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How Country Risk Affects NPV Monk, Inc., is considering a capital budgeting project in Tunisia.
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19. How Country Risk Affects NPV Monk, Inc., is considering a capital budgeting project in Tunisia. The project requires an initial outlay of 1 million Tunisian dinars; the dinar is currently valued at $.70. In the first and second years of operation, the project will generate 700,000 dinars in each year. After 2 years, Monk will terminate the project, and the expected salvage value is 300,000 dinars. Monk has assigned a discount rate of 12 percent to this project.
The following additional information is available:
There is currently no withholding tax on remittances to the United States, but there is a 20 percent chance that the Tunisian government will impose a withholding tax of 10 percent beginning next year.
There is a 50 percent chance that the Tunisian government will pay Monk 100,000 dinar after 2 years instead of the 300,000 dinars it expects. The value of the dinar is expected to remain unchanged over the next 2 years.
A) Determine the net present value of the project in each of the four possible scenarios
B) Determine the joint probability of each scenario.