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

A substantial depreciation in the Algerian dinar would result in decreased revenues for the subsidiary in Algerian dinars when translated into U.S. dollars. This would lower the estimated net present value of the investment compared to the previous forecast. The other choices may mitigate the impact of the currency depreciation, but they still ultimately result in a lower estimated net present value.

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