This 20 page paper looks at a capital budgeting case supplied by the company which involves net present value calculation with the results then used to calculate the value with a range of exchange rates in different scenarios with differing probabilities. The paper answers several questions looking at which choices the company should make and the impact that a change in a country tax rate may impact on that decision. The last part of the paper considers the evidence for different parity theories in the global context. The bibliography cites 8 sources.
Name of Research Paper File: TS14_TENorthstar.rtf
Unformatted Sample Text from the Research Paper:
need to compare these using the net present Value (NPV) method. There is an increased complication as the investment is not in the companies own currency, so the results will
also have to be converted into the companies own currency using an exchange rate. In this question we will first calculate the NPV and when this is calculated for each
year we will convert this with the exchange rate. Theoretically we could undertake this by converting first, but as there are three different exchange rate scenarios which we will have
to weight this is the more efficient method of calculation. First Option The NPV calculation for Scenario 1 The first stage is to undertake the NPV calculation in DM, this
will give us the overall impression and indicate if there is the initial indication of a return of 18% as we are using this as the discount level. This will
also give us the yearly cash flow at the discounted rate which we can then use to calculate the amount that will be returned to the US. Year Net
cash flow (a) discount rate (b) discounted cash flow (a x b) Accumulative total Year 1 8,000,000 0.8475 6,779,661 6,779,661 Year 2 10,000,000 0.7182 7,181,844 13,961,505 Year 3 14,000,000 0.6086
8,520,832 22,482,338 Year 4 16,000,000 0.5158 8,252,622 30,734,960 Year 5 16,000,000 0.4371 6,993,747 37,728,707 Year 6 16,000,000 0.3704 5,926,905 43,655,612 End value 30,000,000 0.3704 11,112,946 54,768,558 Less initial investment 40,000,000
NPV 14,768,558 This indicates there is a positive cash flow at the discount rate of 18%. Next we need to calculate the level of return for the different exchange rate
scenarios using the annual cash flow figures. It is assumed that 50% is reinvested and only 50% can be returned to the US, but that this will be subject to