International Business Finance

Question: Discuss about theInternational Business Finance. Answer: Introduction The current report aims to evaluate the net present value of the provided firm, Zircon, if it receives the government contract. The value for the opposite scenario has also been computed, where the organisation has exercised hedging. The alternative strategy for the organisation has also been depicted along with explaining the uncertainty of future cash inflows. Finally, the report sheds light on conducting the risk assessment of the concerned project. Calculating the NPV of Zircon If Governments Contract is Received: Using the Hedging process Amount NPV with government contracts Development expenses (A) $ (300,000) 1 year Forward spot rate (0.12 * 5,000,000) (B) $ 600,000 Discounting cash flow (C) 0.8474576 PV of the Cash flow (D = B * C) $ 508,474.58 NPV (D - A) $ 208,474.58 Table 1: Showing the NPV valuation for Zircon with government contracts (Source: As created by the author) Table 1 mainly helps in depicting the overfill NPV, which might be generated by the company after receiving the government contracts. In addition, the positive NPV of $208,474.58 mainly indicates the overall viability of the project that might be adopted by Zircon. Arsov et al. (2013) mentioned that hedging are mainly used by companies to reduce their overall risk exposure from volatile currency market. Depicting the Scenario Where no Government Contract was Received and Zircon Hedged more than Needed: NPV without government contracts Development expenses (A) $ (300,000) 1 year Forward spot rate (0.12 * 3,000,000) (B) $ 360,000.00 Excess of Hedging Amount (0.12 * 2,000,000) (C) $ 240,000.00 Spot rate after 1 year (0.13 * 2,000,000) (D) $ 260,000.00 loss from hedging (E = D C) $ (20,000.00) Total cash flow (F = B + E) $ 340,000.00 Discounting cash flow (G) 0.8474576 PV of the Cash flow (H = F * G) $ 288,135.59 NPV (H - A) $ (11,864.41) Table 2: Showing the NPV valuation for Zircon without government contracts (Source: As created by the author) With the help of table 2, the overall NPV valuation of zircon could be identified as negative. In addition, if the company hedges and at the end of the year does not receive any government contracts and then Zircon might incur a loss from the project. Moreover, due to loss from excessive hedging Zircon negative NPV from the project, which in turn might hamper its net profitability. Dorfman and Harter (2013) argued that excessive hedging might negatively affect the overall future cash flows that might be generated from currency exchange. Considering an Alternative Strategy for Zircon: Using the Alternative Hedging strategy Amount Development expenses $ (300,000) 1 year Forward spot rate from Firms income (0.12 * 3,000,000) $ 360,000.00 Income from government at expected spot rate (0.13 * 2,000,000) $ 260,000.00 Total Income $ 620,000.00 Discounting cash flow 0.8474576 PV of the Cash flow $ 525,423.73 NPV $ 225,423.73 Table 3: Showing the alternative strategy for Zircon (Source: As created by the author) Table 3 mainly helps in depicting the overall alternative strategy for Zircon, which might help in generating the overall viability of the project. In addition, the overall hedging will only be conducted for the future cash flow received from firms and the government cash flows will be traded in spot rate. This method has mainly posed the best viable solution, which might help Zircon to make adequate profits from the project and have $225,423.73 NPV. In addition, if the government contract is not received during the year then also Zircon will have positive NPV of $5,084.75. Chen, Li and Reynolds (2012) stated that with the help of NPV method companies are able to compensative for the time value of money, which could be generated from a project. Depicting the Uncertainty of Future Cash Flows for Zircon: The main uncertainty that might be generated is from government contracts, which might be obtained at the end of the year. Chung, Park and Shin (2014) mentioned that international trade have uncertainty due to changing perspective of corporations and governments. However, there are other uncertainties, which might be surrounding the future cash flows of Zircon that are described as follows. The change in currency conversation rate might be different, which in turn might change the whole scenario. However, the forward rates mainly help in maintaining the profitability of the company, which might be generated from firm contracts. The other uncertainty could be generated from changing government policies or restrictions in currency conversion. This type of uncertainty might mainly reduce the overall profitability that might be generated from the project and nullify the hedging process. Zircons main cash flow is from firm contracts and government contracts are the added bonus, which might help the company to obtain higher NPV. Providing Viable Information Regarding the Risk Associated with the Project: The overall risk that might be surrounding the operation of Zircon is the change in exchange rate and accessibility of government contracts. In addition, after the effective evaluation of the scenario and the overall NPV calculation it could be suggested that the company might use alternative strategy for hedging their profits. In addition, the alternative strategy could help the company get a positive NPV of $5,084.75 from firm contracts. Moreover, if the company receives the government contract at the end of the next year then it could effectively use the current spot rate to covert the ARS in USD. This method might mainly help Zircon to reduce the overall risk exposure from over hedging and maintain the required level of profitability. Conclusion: According to the above discussion, it has been found that Zircon would be able to maximise its profitability position, if it receives the government contract in contrast to the opposite scenario. However, the alternative hedging strategy would be more beneficial to Zircon, as the NPV computed is higher compared to the receipt of the government contract. 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