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You are the chief financial officer of Clad Metal a US multinational with operations throughout the world. Your capital budgeting department has presented a proposal to you for a 5- year ore- extraction project in Mexico. The expected year- end net dollar cash flows are as follows:

Year 1 Net Cash Flow $90,000

Year 2 Net Cash Flow $180,000

Year 3 Net Cash Flow $400,000

Year 4 Net Cash Flow $500,000

Year 5 Net Cash Flow $350,000

The initial required investment in plant and equipment is $750,000, and the cost of capital is 11%.

Part I- What is the present value of the project? Should the project be undertaken?

Part II- You notice that the proposal does not include any analysis of political risk, but you are concerned about potential expropriation of the investment. Assume that, the probability of expropriation is 9% every period and that there is no compensation in the case of expropriation. Would you approve of the project?

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M93053391

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