INTERNATIONAL FINANCIAL MANAGEMENT/

DFN3023


ASSIGNMENT 2
CHAPTER /TOPIC : FOREIGN EXCHANGE MARKET

INSTRUCTION:
1. Please answer the entire question.
2. Mode: Individual
3. Date of Submission:

PROGRAM OUTCOME(S):
PO1 Apply knowledge of Finance to well-defined financing procedures and
practices;
PO2 Apply appropriate skills, resources, and analytical tools to Finance
related activities;
PO3 Demonstrate an awareness of and consideration for societal, legal and
ethical issues and their consequent responsibilities;
PO4 Demonstrate an understanding of professional ethics, responsibilities
and norms of Finance practices;
PO5 Communicate, lead and function effectively in a team in achieving
desired goals;
PO6 Analyze problems associated with Finance with respect to operations
and regulations;
PO7 Recognize the need for professional development and to engage in
independent and lifelong learning; and
PO8 Demonstrate an awareness of management and utilize available
resources in accomplishing desired output.

COURSE OUTCOME(S):
CO1 Identify the objective of multinational firm in the international trade
environment
CO2 Describe the international trade environment, particularly in the financial
aspect.
CO3 Organize and prepare the risk financial management from various
economics background.













INTERNATIONAL FINANCIAL MANAGEMENT/
DFN3023


QUESTION

1. Perry Company has an opportunity to invest in a project in Australia for 3 years. The
initial investment for the project is $500,000. According to the analyst, the cost of capital
for similar project is 10 percent. Below is the projects cash flow.






Based on the information given, calculate the net present value of the project. Should
Perry accept the project? Justify?
(7 marks)

2. Baps Corporation is considering the establishment of a subsidiary in Norway. The initial
investment required by the parent is $5,000,000. If the project is undertaken, Baps would
terminate the project after four years. Baps cost of capital is 13 percent, and the project
is of the same risk as Baps existing projects. All cash flows generated from the project
will be remitted to the parent at the end of each year. The current exchange rate of the
Norwegian kroner is $0.135.







Based on the information given, calculate the net present value of the Norwegian
project.
(8 marks)

3. Perrty Co. is a firm based in Iowa, US is considering investing in a project at Poland. The
duration of the project is 3 years. At the end 3 years Perrty Co. will sell the project to a
local firm. The initial investment of the project is $300,000. According to Perrty Co.s
financial analyst the cost of capital for the similar project in US is 10 percent. The
projected cash flow as following:

.
(a) Compute the potential investments Net Present Value (NPV) in US$.
(5 marks)

(b) Calculate the terminal value Perrty Co should sell the project at end of year 3 to a
local company with an exchange rate of $3.3113/PLN.
(4 marks)

Year Cash Flow Forecasted Exchange
1 AUD 300,000 $ 0.45
2 AUD 700,000 $0.65
3 AUD 120,000 $0.70
Year Cash Flow Forecasted Exchange
1 NOK 10,000,000 $ 0.13
2 NOK 15,000,000 $0.14
3 NOK 17,000,000 $0.12
4 NOK 20,000,000 $0.15
Year Cash Flow Forecasted Exchange
1 PLN 30,000 $ 3.3047
2 PLN 70,000 $3.3289
3 PLN 12,000 $3.3113
INTERNATIONAL FINANCIAL MANAGEMENT/
DFN3023


4. Brower, Inc., just constructed a manufacturing plant in Ghana. The construction cost 9
million Ghanian cedi. Brower intends to leave the plant open for 3 years. During the 3
years of operation, cedi cash flows are expected to be 3 million cedi, 3 million cedi and 2
million cedi, respectively. Operating cash flows will begin one year from today and are
remitted back to the parent at the end of each year. Brower has a required rate of return
17 percent. The exchange rate is as follows:

.






Based on the information given, calculate the net present value and salvage value for
end of operation.
(10 marks)

5. A project in South Korea requires an initial investment of SK won 2 million. The project is
expected to generate net cash flow to the subsidiary of SK won 3 million and SK won 4
million in the 2 years of operation, respectively. The current value of the won is 1,100
won per US dollar, and the value is remaining constant over the next 2 year. Calculate
the net present value of the project if the required rate of return is 13 percent.
(6 marks)

6. A Malaysian company is considering starting a subsidiary in Cambodia. This would
require an initial start-up cost of Cambodian (KHR) of KHR 96,000 million. The after-tax
net operating cash flow is expected to be KHR 20,000 million per year for three years. At
the end of the third year, the subsidiary would be sold to the local government agency.
The KHR- Malaysian Ringgit (MYR) rate is KHR 1,200/MYR at current spot, but it is
expected to be KHR 1,212/MYR first year, KHR 1,219/MYR second year and third year
KHR1,236/MYR, respectively. The Malaysian company requires an 18 percent return
from this investment in Cambodia. Calculate the potential investments NPV and the
salvage value at end of third year.
(10 marks)






Year Forecasted Exchange
0 8.7cedi
1 9.135 cedi
2 9.529 cedi
3 10.071 cedi