Livingston Co. has a subsidiary in Korea. The subsidiary reinvests half of its net cash flows into operations and remits half to the parent. Livingston's expected cash flows from domestic business are $100,000, and the Korean subsidiary is expected to generate 100 million Korean won at the end of the year. The expected value of the won is $.0012.

a. What are the expected dollar cash flows of Livingston Co.?

b. What is the present value of the firm if the firm is expected to generate the constant amount of expected dollar cash flows for 10 years?

Instructions are listed below.

Explanation:

Giving the following information:

Livingston's expected cash flows from domestic business are $100,000, and the Korean subsidiary is expected to generate 100 million Korean won at the end of the year. The expected value of the won is $.0012.

1) First, we need to calculate the dollar value of the Korean subsidiary

Korean subsidiary = 100,000,000*0.0012 = 1,200,000 U. S. dollars

Now we can calculate the total cash flow:

Cash flow = 100,000 + 1,200,000 = 1,300,000

2) We will assume that the interest rate is 10%.

To calculate the present value we need to use the following formula:

NPV = ∑[Cf / (1+i) ^n]

Cf = cash flow

For example:

Year 3 = 1,300,000/1.10^3 = 976,709.24

Year 6 = 1,300,000/1.10^6 = 733,816.11

PV = 7,987,937.24