Assume that management is considering whether to make the foreign direct investment described in Exercise 3. Investment will require $6,000,000 in equity capital. Cash flows to the parent are expected to increase by 5 percent over the previous year for each year after year 2 (through year 6). Exchange rate forecasts are as follows:
| Year Don't use plagiarized sources. Get Your Custom Essay on management insists on a risk premium of 10 percent when evaluating foreign projects 543872 For $10/Page 0nly | Rate |
| 1 | RUB 26 = $1 |
| 2 | RUB 27 = $1 |
| 3 | RUB 29 = $1 |
| 4–6 | RUB 31 = $1 |
Management insists on a risk premium of 10 percent when evaluating foreign projects.
Required: Assuming a weighted average cost of capital of 10 percent and no expected changes in differential tax rates, evaluate the desirability of the Russian investment using a traditional discounted cash flow analysis.
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