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A consumer product firm is considering making a major investment in China. The investment is expected to cost $5 billion, and the present value (PV) of the expected cash flows on the investment is only $3.5 billion. However, the firm believes that there are substantial expansion opportunities in China. Would that justify investing the $5 billion? Why or why not?
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- One of the important components of multinational capital budgeting is to analyze the cash flows generated from subsidiary companies. Consider this case: Sacramone Products Co. is a U.S. firm evaluating a project in Australia. You have the following information about the project: • The project requires an investment of AU$1,230,000 today and is expected to generate cash flows of AU$1,200,000 at the end of each of the next two years. • The current exchange rate of the U.S. dollar against the Australian dollar is $0.7877 per Australian dollar (AU$). • The one-year forward exchange rate is $0.8109 / AU$, and the two-year forward exchange rate is $0.8455 / AU$. • The firm’s weighted average cost of capital (WACC) is 9%, and the project is of average risk. What is the dollar-denominated net present value (NPV) of this project? $933,397 $777,831 $738,939 $855,614A company in country X with currency XSD is analyzing a potential investment in country Y with currency YSD. The best estimate is that YSD will be devalued in the international markets at an average of 3%. If the MARR of this company in country X is 23% what is the MARR that the company should use in country Y?The Windsor Foundation, a U.S.-based, not-for-profit charitable organization, has a diversified investment portfolio of $100 million. Windsor’s board of directors is considering an initial investment in emerging market equities. Robert Houston, treasurer of the foundation, has made the following comments:a. “For an investor holding only developed market equities, the existence of stable emerging market currencies is one of several preconditions necessary for that investor to realize strong emerging market performance.”b. “Local currency depreciation against the dollar has been a frequent occurrence for U.S. investors in emerging markets. U.S. investors have consistently seen large percentages of their returns erased by currency depreciation. This is true even for long-term investors.”c. “Historically, the addition of emerging market stocks to a U.S. equity portfolio such as the S&P 500 index has reduced volatility; volatility has also been reduced when emerging market stocks are…
- A developing country has determined that each additional $1 billion of investment in capital goods adds 0.3 percentage point to its long-run average annual rate of growth of per capita real GDP. Domestic entrepreneurs recently began to seek official approval to open a range of businesses employing capital resources valued at $27 billion. If the entrepreneurs undertake these investments, and assuming that other things are equal, calculate the nation's long-run average annual rate of growth of per capita real GDP up to a fraction of a percentage point. nothing percent. (Round your answer to one decimal place.)Kim Hotels is interested in developing a new hotel in Seoul. The company estimates that the hotel would require an initial investment of $20 million. Kim expects that the hotel will produce positive cash flows of $3 million a year at the end of each of the next 20 years. The project's cost of capital is 13%. While Kim expects the cash flows to be $3 million a year, it recognizes that the cash flows could, in fact, be much higher or lower, depending on whether the Korean government imposes a large hotel tax. One year from now, Kim will know whether the tax will be imposed. There is a 50% chance that the tax will be imposed, in which case the yearly cash flows will be only $2.2 million. At the same time, there is a 50% chance that the tax will not be imposed, in which case the yearly cash flows will be $3.8 million. Kim is deciding whether to proceed with the hotel today or to wait 1 year to find out whether the tax will be imposed. If Kim waits a year, the initial investment will remain…Drysdale Co. (a U.S. firm) is considering a new project that would result in cash flows of 5 million Argentine pesos in 1 year under the most likely economic and political conditions. The spot rate of the Argentina peso in 1 year is expected to be $.40 based on these conditions. However, it wants to also account for the 10 percent probability of a political crisis in Argentina, which would change the expected cash flows to 4 million Argentine pesos in 1 year. In addition, it wants to account for the 20 percent probability that the exchange rate may only be $.36 at the end of 1 year. These two forms of country risk are independent. Drysdale’s required rate of return is 25 percent and its initial outlay for this project is $1.4 million. Show the distribution of possible outcomes for the project’s net present value (NPV).
- The CMOS Electronics Company is considering a capital investment of 50,000,000 pesos in an assembly plant located in a foreign country. Currency is expressed in pesos, and the exchange rate is now 100 pesos per U.S. dollar. The country has followed a policy of devaluing its currency against the dollar by 10% per year to build up its export business to the United States. This means that each year the number of pesos exchanged for a dollar increases by 10% (fe = 10%), so in two years (1.10)2(100) = 121 pesos would be traded for one dollar. Labor is quite inexpensive in this country, so management of CMOS Electronics feels that the proposed plant will produce the following rather attractive ATCF, stated in pesos: If CMOS Electronics requires a 15% IRR per year, after taxes, in U.S. dollars (ius) on its foreign investments, should this assembly plant be approved? Assume that there are no unusual risks of nationalization of foreigninvestments in this country.You are International Business Manager at a UK based company. Considering high demand your company plans a full-scale expansion. Your company has identified USA and Europe as potential markets. You are requested to analyse both projects and advise. In considering such large project, you must work out the risk of each project, cost of capital and NPV. Allocate discount rate for each project accordingly and justify why you allocated this rate in your discussion. Discuss how international risks can be managed. Projected cash flows in respective currencies: Year Net Cash Flow – USD USA Net Cash Flow - EUR Europe0 -20 million -20 million 1 2 million 2 million2 4 million 3 million3 5 million 4 million4 6 million 8 million5 8 million 8 million Instructions:a. Discuss viability of both projects in today’s global business context and allocate discount rate. b. How much investment is needed for each project and what is the NPV of each project? c.…Company X has an investment opportunity in Europe. The project costs €30,000,000 and is expected to produce cash flows of €21,000,000in Year 1, €31,000,000 in Year 2 and €22,000,000 in Year 3. The current exchange rate is €1.25% and the current risk free rate in United States is 5% compared to that of Europe of 3.5%. The appropriate discount rate for the project is estimated to be 13% the U.S. cost of capital for the company. In addition the subsidiary can be sold at the end of three years for an estimated €6,250,000. a. What is the NPV of the project? *Use the Home Currency Approach to calculate the NPV.
- Apple is considering a large capital investment in Brazil. The project cash flows have been prepared in Reals, however, Apple plans to fund the entire investment out of its US Dollar ($) holdings. Describe the qualitative and quantitative capital budgeting procedures that Apple should use to evaluate the investment.Savory Seafood Inc. is a U.S. firm that wants to expand its business internationally. It is considering potential projects in both Germany and Mexico, and the German project is expected to take six years, whereas the Mexican project is expected to take only three years. However, the firm plans to repeat the Mexican project after three years. These projects are mutually exclusive, so Savory Seafood Inc.’s CFO plans to use the replacement chain approach to analyze both projects. The expected cash flows for both projects follow: Project: German Year 0: –$1,120,000 Year 1: $370,000 Year 2: $390,000 Year 3: $420,000 Year 4: $330,000 Year 5: $220,000 Year 6: $95,000 Project: Mexican Year 0: –$520,000 Year 1: $275,000 Year 2: $280,000 Year 3: $295,000 If Savory Seafood Inc.’s cost of capital is 11%, what is the NPV of the German project? Assuming that the Mexican project’s cost and annual cash inflows do not change when the project is…
