K-Roo Ltd. wants to expand its operations to Brazil. It estimates the cash flows from the project, in millions of BRL, w

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K Roo Ltd Wants To Expand Its Operations To Brazil It Estimates The Cash Flows From The Project In Millions Of Brl W 1 (139.32 KiB) Viewed 45 times

K-Roo Ltd. wants to expand its operations to Brazil. It estimates the cash flows from the project, in millions of BRL, will be the following: Year 1 Year 2 Year 3 Year 4 40 90 130 165 The project has an initial up-front cost of BRL101 million, and the cost of capital is 17%. K-Roo however expects that there is a 32% chance in any given year that the investment will be expropriated by the Brazil government. If the investment is expropriated, no cash flows materialize. To protect the investment against the risk of expropriation, K-Roo can buy insurance for BRL6 million, payable at the beginning of each year that it wants to cover. If it holds insurance and the investment is expropriated, it will receive BRL32.31 million in payment. The current spot BRL/USD exchange rate is BRL5.5/USD. What is the NPV of the investment in real if K-Roo decides to buy the insurance every year? a. BRL104 million b. BRL16.50 million c. BRL2.998 million d. BRL9 million e. BRL0.55 million