Let's assume that Stepp Inc. is considering the establishment of a subsidiary in Norway. The initial investment required by the parent is $4,200,000. If the project is undertaken, Stepp Inc. would terminate the project after four years. Stepp Inc. cost of capital is 13%, and the project is of the same risk as Stepp Inc. existing projects. All cash flows generated from the project will be remitted to the parent at the end of each year. Listed below are the estimated cash flows the Norwegian subsidiary will generate over the project’s lifetime in Norwegian kroner (NOK):
Year 1 Year 2 Year 3 Year 4
NOK8,200,000 NOK13,400,000 NOK16,700,000 NOK18,400,000
The current exchange rate of the Norwegian kroner is $.135. Stepp Inc. exchange rate forecast for the Norwegian kroner over the project’s lifetime is listed below:
Year 1 Year 2 Year 3 Year 4
$.13 $.14 $.12 $.15
What is the net present value of the Norwegian project?