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Step 2
Determine the discrete probability distribution of the venture cash flows, calculate the net present
value to Robinson for its share of this joint venture, and then calculate the expected net present value.
First we calculate the investment in billions of Colombian pesos (COP): $20 million multiplied by an
exchange rate of $1 to COP 2,212.64 equals COP 44,252 billion. We will assume straight-line
depreciation over five years for U.S. tax purposes. (See Exhibit 7.17.)
Now let‟s take the net present value using the required return of 13% (Exhibit 7.18).
As you can see, we get $45 million positive NPV. If the project lasts only five years, the internal
rate of return (IRR) can be computed using Excel as 57% for the case where all goes as expected.
Now let‟s assume that the rebels overthrow the government, a possible but unlikely event. In this
case Robinson would receive only the cash flow from years 1 and 2. What we would see is shown in
Exhibit 7.19.
Even without considering any tax break from writing off the investment, we see a positive NPV.
Exhibit 7.16 Calculation of weighted average cost of capital (WACC) for Robinson.
Exhibit 7.17 Time line of cash flows to CCB-Robinson venture.