A U.S.-based MNC has just established a subsidiary in Algeria. Shortly aFter the plant was built, the MNC determines that its exchange rate forecasts, which had previously indicated a slight appreciation in the Algerian dinar, were probably false. Instead of a slight appreciation, the MNC now expects that the dinar will depreciate substantially due to political turmoil in Algeria. This new development would likely cause the MNC to ____ its estimate of the previously computed net present value.
A)lower
B)increase
C)lower, but not necessarily if the MNC invests enough in Algeria to offset the decrease in NPV
D)increase, but not necessarily if the MNC reduces its investment in Algeria by an offsetting amount
E)none of the above

Question

Quizplus · Accepted Answer

If the dinar is expected to depreciate substantially, then the MNC's future cash flows from its subsidiary in Algeria will be worth less in present value terms. This would lower the previously computed net present value of the subsidiary. The other answer options are not accurate, as offsetting investments or reduced investment would still result in a lower net present value due to the expected depreciation of the dinar.

A US-Based MNC Has Just Established a Subsidiary in Algeria