Скачать презентацию Chapter 18 International Financial Management Copyright Скачать презентацию Chapter 18 International Financial Management Copyright

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Chapter 18 • International Financial Management Copyright © 2010 Pearson Prentice Hall. All rights Chapter 18 • International Financial Management Copyright © 2010 Pearson Prentice Hall. All rights reserved.

Learning Objectives 1. Understand cultural, business, and political differences in business practices. 2. Calculate Learning Objectives 1. Understand cultural, business, and political differences in business practices. 2. Calculate exchange rates, cross rates, and forward rates. 3. Understand transaction exposure, operating exposure, and translation exposure. 4. Apply net present value to foreign projects. Copyright © 2010 Pearson Prentice Hall. All rights reserved. 18 -2

18. 1 Managing Multinational Operations • When a firm goes multinational, the complexity of 18. 1 Managing Multinational Operations • When a firm goes multinational, the complexity of the management component increases significantly because of differences in host countries’ – cultures – business practices – political systems Copyright © 2010 Pearson Prentice Hall. All rights reserved. 18 -3

18. 1 (A) Cultural Risk • • • Cultural risk arises from differences in 18. 1 (A) Cultural Risk • • • Cultural risk arises from differences in customs, social norms, attitudes, assumptions, and expectations of the local society in the host country. Differences in ownership structure: – a requirement to set up joint ventures in certain countries – a requirement to increase local participation and ownership Differences in human resource norms: – hiring and firing norms – different cultural attitudes towards women and minorities in the workplace – local promotions and reward systems may not be consistent with those of the home office and may have to be altered to maintain positive relations with local employees, customers, and government officials Religious heritage of the host country: – the way employees dress – holiday observances Copyright © 2010 Pearson Prentice Hall. All rights reserved. 18 -4

18. 1 (A) Cultural Risk (continued) • Nepotism and corrupt practices in the host 18. 1 (A) Cultural Risk (continued) • Nepotism and corrupt practices in the host country: – a requirement to hire relatives of government officials as a condition of doing business (Indonesia) and – bribery of officials to get permits and licenses— considered to be illegal in the U. S. —may be normal practices in some foreign countries. • Intellectual property rights: – copyrights and patents may not be honored in some foreign countries (e. g. , China) • Although attempts are being made to alter the landscape of differences in attitudes towards intellectual property rights (e. g. 2001 treaty), much still needs to be done. Copyright © 2010 Pearson Prentice Hall. All rights reserved. 18 -5

18. 1 (B) Business Risk • Arises from economic factors such as – inflation 18. 1 (B) Business Risk • Arises from economic factors such as – inflation rates – recessions – interest rate movements – exchange rate fluctuations • Tend to be more pronounced when operating in multiple countries. • Efficient diversification of such risk factors is key to success. Copyright © 2010 Pearson Prentice Hall. All rights reserved. 18 -6

18. 1 (C) Political Risk • Arises from changing attitudes of the political leadership 18. 1 (C) Political Risk • Arises from changing attitudes of the political leadership towards MNCs, resulting in loss of subsidies or risk of nationalization. • MNCs can defend against such risks by – Keeping critical operations private: maintaining key or critical elements of operations safely within the firm, thereby rendering the assets useless in case of nationalization. – Financing operations and assets with local money so that local creditors can put pressure on the host government not to nationalize the business. – Receiving primary inputs outside the local economy: it may be that which the assets and operations of the MNC will not be valuable without such inputs. Copyright © 2010 Pearson Prentice Hall. All rights reserved. 18 -7

18. 2 Foreign Exchange • With each sovereign nation having its own currency (except 18. 2 Foreign Exchange • With each sovereign nation having its own currency (except of course, the euro which is the accepted currency in 16 out of 27 countries of the European Union), MNCs have to keep track of the fluctuations in exchange rates of various currencies caused by changing economic factors such as interest rates, inflation rates, and productivity. Copyright © 2010 Pearson Prentice Hall. All rights reserved. 18 -8

18. 2 (A) Purchasing Power Parity • Purchasing power parity the price of similar 18. 2 (A) Purchasing Power Parity • Purchasing power parity the price of similar goods is the same regardless of which currency one uses to buy the goods. • Table 18. 1 shows how the price of a Big Mac in various countries can be used to keep track of relative purchasing power and exchange rates in countries where Mc. Donalds operates. Copyright © 2010 Pearson Prentice Hall. All rights reserved. 18 -9

18. 2 (A) Purchasing Power Parity (continued) TABLE 18. 1 Big Mac Index • 18. 2 (A) Purchasing Power Parity (continued) TABLE 18. 1 Big Mac Index • • • Price in US $ = Price of a Big Mac in Foreign Currency/ HK$/1 US$ For Hong Kong, Price in US$ HK$13. 3/HK$7. 75 = $1. 72 For Hong Kong, Price in US$ Purchasing Power(Hong Kong) = Price in HK$/Price in US$=HK$13. 3/$3. 54 3. 76 Purchasing Power(Hong Kong) = Price in HK$/Price in US$=HK$13. 3/$3. 54 Copyright © 2010 Pearson Prentice Hall. All rights reserved. 18 -10

18. 2 (A) Purchasing Power Parity (continued) • In the real world, exchange rates 18. 2 (A) Purchasing Power Parity (continued) • In the real world, exchange rates are based on the prices of a basket of goods rather than on a single item in different countries. • In general, the rate at which we can exchange money between currencies should allow us to purchase the same basket of goods in any country with the basket of goods same dollars (except for local tariffs, etc. ). Copyright © 2010 Pearson Prentice Hall. All rights reserved. 18 -11

18. 2 (C) Currency Exchange Rates • can be expressed in – direct form 18. 2 (C) Currency Exchange Rates • can be expressed in – direct form (amount of US$ required to buy 1 unit of foreign money). Also known as the American rate. – indirect form (amount of foreign money required to buy 1 US$). Also know as the European rate. Copyright © 2010 Pearson Prentice Hall. All rights reserved. 18 -12

18. 2 (C) Currency Exchange Rates (continued) TABLE 18. 2 Exchange Rates (May 12, 18. 2 (C) Currency Exchange Rates (continued) TABLE 18. 2 Exchange Rates (May 12, 2009) Copyright © 2010 Pearson Prentice Hall. All rights reserved. 18 -13

18. 2 (C) Currency Exchange Rates (continued) Calculation of these rates is as follows: 18. 2 (C) Currency Exchange Rates (continued) Calculation of these rates is as follows: So, 1 Mexican peso can buy roughly 8 US cents. If we divide the direct rate into 1, that is, take its reciprocal, we get the indirect or European rate: Indirect rate = 1/$0. 0755 13. 245 Mexican pesos So, 1 US$ can buy 13. 245 Mexican pesos. Copyright © 2010 Pearson Prentice Hall. All rights reserved. 18 -14

18. 2 (D) Cross Rates • Cross rates are used to state the exchange 18. 2 (D) Cross Rates • Cross rates are used to state the exchange rate between two non-US currencies, – for example, the exchange rate between the British pound and the yen. We can use a three-step process to determine the rate: 1. We first convert pounds (£) into U. S. dollars. Using the direct rate from Table 18. 2, we see that 1 £ buys $1. 5253. 2. We then convert our dollars into yen at the indirect rate of ¥ 96. 16 per dollar. So, $1. 5253 times 96. 126 buys ¥ 146. 6728. 3. We now have an exchange rate for pounds to yen via the U. S. dollar. That is, if we start with 1 £, we will end up with ¥ 146. 6728: Copyright © 2010 Pearson Prentice Hall. All rights reserved. 18 -15

18. 2 (D) Cross Rates (continued) In Britain, this would be the indirect rate 18. 2 (D) Cross Rates (continued) In Britain, this would be the indirect rate between the British pound and the Japanese Yen, that is, it would tell us how many units of yen can be bought with 1 £. To solve for the direct rate between the £ and the yen, we simply take the reciprocal of the indirect rate > 1/146. 6728 >. 0006817 £. Alternatively, we can solve for the indirect rate between 2 currencies — for example, the amount of yen that 1 £ can buy. To do so, we take the direct or American rate of the first foreign currency and multiply it by the indirect or European rate of the second foreign currency. Copyright © 2010 Pearson Prentice Hall. All rights reserved. 18 -16

18. 2 (E) Arbitrage Opportunities Arbitrage opportunities exist when cross rates, as determined by 18. 2 (E) Arbitrage Opportunities Arbitrage opportunities exist when cross rates, as determined by Equation 18. 3, do not hold: – allows traders the opportunity to exchange currencies simultaneously and make instant profits without taking on any additional risk Copyright © 2010 Pearson Prentice Hall. All rights reserved. 18 -17

18. 2 (E) Arbitrage Opportunities (continued) Example 1: Triangular arbitrage Problem Let’s say that 18. 2 (E) Arbitrage Opportunities (continued) Example 1: Triangular arbitrage Problem Let’s say that you see that the direct rate for Euro is 1. 2922 and the indirect rate for the Yen is 96. 16. You check the internet and find that the indirect rate for Yen in Euros is 130 yen. You have $10, 000 and are willing to make quick gains if possible. Is there an arbitrage opportunity here? Solution First, use Equation 18. 3 to determine if the indirect rate for yen in euros is correct. According to Equation 18. 3, the indirect rate for yen per euro = Direct rate for euros in US$* Indirect rate for yen in US = $ 1. 2922*96. 16 124. 26 Y/euro, which is less than the Indirect Rate so the euro seems to be overvalued. Copyright © 2010 Pearson Prentice Hall. All rights reserved. 18 -18

18. 2 (E) Arbitrage Opportunities (continued) You would then convert dollars into euros, buy 18. 2 (E) Arbitrage Opportunities (continued) You would then convert dollars into euros, buy Yen at the indirect rate, and convert yen back to dollars as follows: Direct rate for euro = 1. 2922 $1. 2922 = 1 euro or $1 = 1/1. 2922 euro 0. 773874 euro. $10, 000*0. 77387 euros/$ 7738. 74 euros * 130 yen/euro 1006036. 22 yen *. 0104$/yen=$10, 462. 77 So make a cool $462. 77 before commissions. YES! THIS WOULD BE AN ARBITRAGE OPPORTUNITY! Copyright © 2010 Pearson Prentice Hall. All rights reserved. 18 -19

18. 2 (F) Forward Rates The exchange rates in the future, e. g. , 18. 2 (F) Forward Rates The exchange rates in the future, e. g. , one year from now, depend to a large extent on the current exchange rate and the relative expected inflation rates in the 2 countries, as shown in Equation 18. 4 Where inff = expected inflation rate in the foreign country and infh = expected inflation rate in the host country. Copyright © 2010 Pearson Prentice Hall. All rights reserved. 18 -20

18. 2 (F) Forward Rates (continued) If a country’s inflation rate increases relatively higher 18. 2 (F) Forward Rates (continued) If a country’s inflation rate increases relatively higher than that of another country, then its currency’s exchange rate will get weaker, that is, it will buy fewer units of the currency of the country whose inflation rate did not increase as much. Equation 18. 4 applies to a 1 -year forward rate. A more general formula that can be used for predicting forward rates for any future period is shown in Equation 18. 5: here T is time in years, I. e. , 9 months > = T = 9/12 = 0. 75 and 3 years would have T = 3 Copyright © 2010 Pearson Prentice Hall. All rights reserved. 18 -21

18. 2 (F) Forward Rates (continued) Example 2: Calculating forward rates: Let’s say that 18. 2 (F) Forward Rates (continued) Example 2: Calculating forward rates: Let’s say that the Australian $ is currently being quoted at A$1. 3109/US$. • If inflation is likely to be 8% in Australia and 4% in the United States, calculate the indirect forward rate for the Australian dollar 3 months from now. Copyright © 2010 Pearson Prentice Hall. All rights reserved. Forward indirect rate --3 months = A$ 1. 3109 * (1. 08/1. 04)3/12 A$1. 3233 • So, since inflation is expected to rise higher in Australia than in the United States, the Aussie $ is expected to get weaker, that is, 1 US$ will buy more A$ than before. 18 -22

18. 2 (G) Using Forward Rates Investors and companies can use forward contracts minimize 18. 2 (G) Using Forward Rates Investors and companies can use forward contracts minimize their risk of losses arising from having to convert money received in foreign currencies at lower rates. The forward rate is the rate that is being committed to today forward delivery of the currency. So if rates go down, you still get the forward rate that was agreed upon. According to the International Fisher Effect, the real interest rates are equal across all countries, so if we get a higher rate in one country, it will be offset by a higher inflation in that country and a weakening exchange rate. Covered interest arbitrage is an attempt made by some investors to try to exploit variances in inflation rates and interest rates across countries. Most often, however, the exchange rate adjusts in such a way that the arbitrage opportunities do not materialize. Copyright © 2010 Pearson Prentice Hall. All rights reserved. 18 -23

18. 3 Transaction, Operating, and Translation Exposure • Fluctuations in exchange rates cause a 18. 3 Transaction, Operating, and Translation Exposure • Fluctuations in exchange rates cause a firm’s future cash inflows, to vary significantly, leading to possible losses and gains from transaction, operating, and translation exposure. Copyright © 2010 Pearson Prentice Hall. All rights reserved. 18 -24

18. 3 (A) Transaction Exposure This exposure can and must be hedged by selling 18. 3 (A) Transaction Exposure This exposure can and must be hedged by selling the currency forward, that is, by entering into selling forward contract, whereby the forward selling price of the foreign currency to be received is agreed upon today. is the potential loss in home currency value of future foreign currency payments. • This loss can occur if the home currency gets stronger, meaning that fewer units can be purchased per unit of the foreign currency. Copyright © 2010 Pearson Prentice Hall. All rights reserved. 18 -25

18. 3 (B) Operating Exposure Unfavorable exchange rate movements Operating Exposure: threat to the 18. 3 (B) Operating Exposure Unfavorable exchange rate movements Operating Exposure: threat to the long-run viability of a foreign operation of a multinational business Escalating inflation rates Copyright © 2010 Pearson Prentice Hall. All rights reserved. 18 -26

18. 3 (B) Operating Exposure TABLE 18. 4 Dollar Profit per Swedish Bicycle Sale: 18. 3 (B) Operating Exposure TABLE 18. 4 Dollar Profit per Swedish Bicycle Sale: No Change in Exchange Rate (inflation the same in both countries) TABLE 18. 5 Dollar Profit per Swedish Bicycle Sale: Increase in Exchange Rate Due to Different Inflation Rates Tables 18. 4 and 18. 5 illustrate the effects of rising inflation rates on a country’s exchange rate and the consequential negative effect on operating profits of a U. S. firm doing business in Sweden. Copyright © 2010 Pearson Prentice Hall. All rights reserved. 18 -27

18. 3 (C) Translation Exposure Differences in rules for translating foreign financial statements Affects 18. 3 (C) Translation Exposure Differences in rules for translating foreign financial statements Affects the way consolidated statements are reported. Leading to a risk of negative effects on a firm’s financial statements Copyright © 2010 Pearson Prentice Hall. All rights reserved. 18 -28

18. 4 Foreign Investment Decisions • When evaluating multinational capital budgeting projects, the NPV 18. 4 Foreign Investment Decisions • When evaluating multinational capital budgeting projects, the NPV analysis can be done with either foreign currency cash flows or with domestic currency cash flows. • Two main differences between foreign and domestic investment decisions include: 1. the use of an appropriate discount rate that discount rate accounts for the relative inflation rates in the two countries 2. the conversion of cash flows using an appropriate exchange rate Copyright © 2010 Pearson Prentice Hall. All rights reserved. 18 -29

18. 4 Foreign Investment Decisions (continued) Copyright © 2010 Pearson Prentice Hall. All rights 18. 4 Foreign Investment Decisions (continued) Copyright © 2010 Pearson Prentice Hall. All rights reserved. 18 -30

18. 4 Foreign Investment Decisions (continued) Copyright © 2010 Pearson Prentice Hall. All rights 18. 4 Foreign Investment Decisions (continued) Copyright © 2010 Pearson Prentice Hall. All rights reserved. 18 -31

18. 4 Foreign Investment Decisions (continued) Copyright © 2010 Pearson Prentice Hall. All rights 18. 4 Foreign Investment Decisions (continued) Copyright © 2010 Pearson Prentice Hall. All rights reserved. 18 -32

18. 4 Foreign Investment Decisions (continued) Copyright © 2010 Pearson Prentice Hall. All rights 18. 4 Foreign Investment Decisions (continued) Copyright © 2010 Pearson Prentice Hall. All rights reserved. 18 -33

18. 4 Foreign Investment Decisions (continued) Copyright © 2010 Pearson Prentice Hall. All rights 18. 4 Foreign Investment Decisions (continued) Copyright © 2010 Pearson Prentice Hall. All rights reserved. 18 -34

Additional Problems with Answers Problem 1: Currency Exchange Rates On the day you arrive Additional Problems with Answers Problem 1: Currency Exchange Rates On the day you arrive in New Zealand, the exchange rate for U. S. dollars and New Zealand dollars is $1: 2. 25 NZ$. – While you remain in New Zealand for the next few months, the exchange rate falls to $1: $1. 75439 NZ$. – When you entered New Zealand, you converted US$10, 500 to NZ$. – As you leave New Zealand, you have NZ$ 400. • How much did you spend in New Zealand in U. S. dollars? • Did the movement in the exchange rate help or hurt you? Copyright © 2010 Pearson Prentice Hall. All rights reserved. 18 -35

Additional Problems with Answers Problem 1 (Answer) Convert US$ to NZ$: $ 10, 500 Additional Problems with Answers Problem 1 (Answer) Convert US$ to NZ$: $ 10, 500 x 2. 25 = NZ$23, 625 Remaining NZ$ after trip is over = NZ$400; Amount spent NZ$23, 625 -NZ$400=NZ$ 23, 225 Dollars left after converting: NZ$400 /1. 75439 = $ 228 Dollars Spent: $10, 500 - $228. 00 = $10, 272 Appreciation of the NZ$ helped you: you bought the NZ low and sold the NZ high Initial value of $1. 00 = NZ$2. 25 Ending value of $ = NZ$2. 25/NZ$ 1. 75439 = 1. 2825 You gained about 28. 25 cents per dollar while in New Zealand. Copyright © 2010 Pearson Prentice Hall. All rights reserved. 18 -36

Additional Problems with Answers Problem 2: Cross-Rates You plan to travel to South Korea Additional Problems with Answers Problem 2: Cross-Rates You plan to travel to South Korea and China on a business trip. – You will first stop in Korea, where the current direct exchange rate is $1: 1243. 78 SK Won. – You will next stop in China, where the current direct exchange rate is $1: Yuan 6. 83013. – As you leave South Korea, you have 825, 000 Won and need to convert it to Yuan. • What is the cross-rate for Yuan, and how many Yuan do you get for your won? • Verify by converting won back to dollars and then dollars to Yuan. Copyright © 2010 Pearson Prentice Hall. All rights reserved. 18 -37

Additional Problems with Answers Problem 2 (Answer) Direct rate: $0. 000804 / Won 1. Additional Problems with Answers Problem 2 (Answer) Direct rate: $0. 000804 / Won 1. 00 & $0. 1464101 /Yuan 1. 00 Cross rate: ($0. 000804 / Won 1. 00) / ($0. 1464101/Yuan 1. 00) Yuan 0. 00549142 / Won 1. 00 Convert: 125, 000 Won to Yuan = Won 825, 000 x (0. 00549142) Yuan 4, 530. 42 Verification: 825, 000 Won= 825, 000*. 000804 $663. 3*6. 83013 Yuan 4, 530. 42 Copyright © 2010 Pearson Prentice Hall. All rights reserved. 18 -38

Additional Problems with Answers Problem 3: Triangular Arbitrage On-Line Currency, Inc. is an online Additional Problems with Answers Problem 3: Triangular Arbitrage On-Line Currency, Inc. is an online currency exchange company that will immediately convert and credit your bank account based on its published rates. Being the smart finance major that you are, you notice that one of the rates published below is incorrect, and you want to take advantage of it. Let’s say that you have $20, 000 of next semester’s college funds sitting in your checking account and decide to take advantage of the error by doing a triangular arbitrage (we do not advise doing this in reality!). Explain how you would go about doing the arbitrage by first identifying the mismatched currency pair: $ for £ £ for € € for $ £ for $ € for £ $ for € 0. 5510 1. 5235 1. 3046 1. 81488203 0. 95683 0. 7665 Copyright © 2010 Pearson Prentice Hall. All rights reserved. 18 -39

Additional Problems with Answers Problem 3 (Answer) Direct £ 0. 5510 = $1. 00 Additional Problems with Answers Problem 3 (Answer) Direct £ 0. 5510 = $1. 00 € 1. 5235 = £ 1. 00 $1. 3046 = € 1. 00 Indirect $1. 81488203 £ 1. 00 £ 0. 65638333 € 1. 00 € 0. 7665 $1. 00 Actual Indirect: $1. 81488203 £ 1. 00 £ 0. 95683 = Mismatch € 1. 00 € 0. 7665 $1. 00 Arbitrage strategy: Need to use the mismatched Euros to British Pounds… 1. Convert $ to €: $20, 000 x 0. 7665 = € 15, 330 2. Convert € to £: € 15, 330 x 0. 95683 = £ 14, 668. 20390 3. Convert £ to $: £ 14, 668. 20 x 1. 81488203 = $26, 621. 06 Profit: $ 6, 621. 06 Copyright © 2010 Pearson Prentice Hall. All rights reserved. 18 -40

Additional Problems with Answers Problem 4: Forward Rates The Wall Street Journal lists forward Additional Problems with Answers Problem 4: Forward Rates The Wall Street Journal lists forward rates for Euros. Say that the current listings are: 1 -month forward rate (indirect) 0. 7025 3 -month forward rate (indirect) 0. 7145 6 -month forward rate (indirect) 0. 7245 1) Is the anticipated inflation rate higher or lower in Europe compared with that in the United States? 2) If the current indirect rate is 0. 6994, what do the six-month rate and the current rate imply about the relative difference in the anticipated annual inflation rates? 3) Using the current indirect rate and the 6 -month forward rate, determine the annual anticipated inflation rates for Europe if the U. S. inflation rate is anticipated to be 3. 15%. Copyright © 2010 Pearson Prentice Hall. All rights reserved. 18 -41

Additional Problems with Answers Problem 4 (Answer) Forward indirect rates: One month € 0. Additional Problems with Answers Problem 4 (Answer) Forward indirect rates: One month € 0. 7025 / $ 1. 00 Three months € 07145 / $ 1. 00 Six months € 0. 7245 / $ 1. 00 A depreciating € signifies higher inflation in the next six months for Europe versus the United States. Inflation: 0. 7245 = 0. 6994 x [(1 + inf. EUROPE)/(1 + inf. US)]0. 5 [(1 + inf. EUROPE) / (1 + inf. US)] = (. 7245 /. 6994)2 [(1 + inf. EUROPE) / (1 + inf. US)] = 1. 07306375 (1 + inf. EUROPE) = (1 + inf. US) x 1. 07306375 Since inflation in US is 3. 15% (1 + inf. EUROPE) = (1. 0315) x 1. 07306375 1. 10686526 Inf EUROPE = 10. 69% Copyright © 2010 Pearson Prentice Hall. All rights reserved. 18 -42

Additional Problems with Answers Problem 5: Domestic NPV Approach Kalamazoo Marine wants to expand Additional Problems with Answers Problem 5: Domestic NPV Approach Kalamazoo Marine wants to expand its operations to New Zealand. The current indirect exchange rate is 1. 75 for U. S. and New Zealand dollars. The anticipated inflation rate is 3. 8% in the United States, but only 1. 75% in New Zealand. The discount rate in the United States for the expansion project is 16%. If the following after-tax cash flows have been forecasted for the expansion project in NZ$, should Kalamazoo Marine expand to New Zealand? Investment: NZ$ 60, 000 Cash Flows: Year 1 – NZ$7, 000 Year 2 – NZ$10, 000 Year 3 – NZ$ 25, 000 Year 4 – NZ$ 19, 000 Year 5 – NZ$ 17, 000 Year 6 – NZ$ 5, 000 Copyright © 2010 Pearson Prentice Hall. All rights reserved. 18 -43

Additional Problems with Answers Problem 5 (Answer) • Anticipated forwards: • Yr 1. (NZ$1. Additional Problems with Answers Problem 5 (Answer) • Anticipated forwards: • Yr 1. (NZ$1. 75/$1. 00) x (1. 0175/1. 038) = NZ$1. 7154/$1. 00 • Yr 2. (NZ$1. 75/$1. 00) x (1. 0175/1. 038)2 = NZ$1. 6816/$1. 00 • Yr 3. (NZ$1. 75/$1. 00) x (1. 0175/1. 038)3 = NZ$1. 6483/$1. 00 • Yr 4. (NZ$1. 75/$1. 00) x (1. 0175/1. 038)4 = NZ$1. 6158/$1. 00 • Yr 5. (NZ$1. 75/$1. 00) x (1. 0175/1. 038)5 = NZ$1. 5839/$1. 00 • Yr 6. (NZ$1. 75/$1. 00) x (1. 0175/1. 038)6 = NZ$1. 5526/$1. 00 Copyright © 2010 Pearson Prentice Hall. All rights reserved. 18 -44

Additional Problems with Answers Problem 5 (Answer continued) Cash Flows: $ value Present Value Additional Problems with Answers Problem 5 (Answer continued) Cash Flows: $ value Present Value NZ$ -60, 000 / 1. 75 = $ -34, 285, 714. 29 NZ$ 7, 000 / 1. 7154 = $ 4, 080, 680. 89/ (1. 16) $ 3, 517, 828. 35 NZ$ 10, 000 / 1. 6816 = $ 5, 946, 717. 41/ (1. 16)2 $ 4, 419, 379. 77 NZ$ 25, 000 / 1. 6483 = $ 15, 167, 141. 90/ (1. 16)3 $ 9, 716, 945. 85 NZ$ 19, 000 / 1. 6158 = $ 11, 758, 881. 05/ (1. 16)4 $ 6, 494, 325. 32 NZ$ 17, 000 / 1. 5839 = $ 10, 733, 000. 82/ (1. 16)5 $ 5, 110, 121. 39 NZ$ 5, 000 / 1. 5526 = $ 3, 220, 404. 48/ (1. 16)6 $ 1, 321, 790. 08 NPV = ∑(PV Column) -$ 3, 705, 323. 53. Do not expand…Negative NPV! Copyright © 2010 Pearson Prentice Hall. All rights reserved. 18 -45