Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 70

Joint Venture Perez Group has the opportunity to enter into a joint venture giving it a 49 percent ownership with local investors in an emerging country. The firm would be required to invest the entire $3,000,000 initial outlay needed for the venture and would receive 80 percent of the expected $900,000 yearly net cash flows for 10 years. At the end of 10 years, ownership will be turned over to the local investors. Cost of capital is 10 percent. Because of the inherent risk of overseas investments, Perez will accept such projects only if the projected IRR is more than 20 percent.

Required Should Perez invest in the project?