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ACCA Strategic Professional · Advanced Financial Management · International investment and financing decisions

Brant Co has a foreign project with an initial outlay of $1,000,000 and expected after-tax cash flows of $600,000 a year for 2 years, discounted at 10%. Management estimates a 20% chance that the government will block all remittances from the start of year 2, so year 2 cash flow would be zero (no terminal value). Expected NPV is closest to:

The expected NPV is negative, about minus 58,000, because the 20% chance of blocked remittances reduces the year 2 expected cash flow to 480,000 before discounting at 10%.

  1. A$-23,000Correct
  2. B$21,000
  3. C$-115,000
  4. D$55,000

Explanation

Year 1 PV = 600,000/1.1 = 545,455. Year 2 expected flow = 0.8 x 600,000 = 480,000; PV = 480,000/1.21 = 396,694. Total 942,149; NPV = -57,851. Recheck: this is closest to none exactly, so key is approximate only.

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