International Financial Management
14th Edition
ISBN: 9780357130698
Author: Madura
Publisher: Cengage
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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.…
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.
Evaluating projects with unequal lives
Tasty Tuna Corporation is a U.S. firm that wants to expand its business internationally. It is considering potential projects in both Germany and Thailand, and the German project is expected to take six years, whereas the Thai project is expected to take only three years. However, the firm plans to repeat the Thai project after three years. These projects are mutually exclusive, so Tasty Tuna Corporation’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:
–$800,000
Year 1:
$380,000
Year 2:
$400,000
Year 3:
$420,000
Year 4:
$375,000
Year 5:
$110,000
Year 6:
$85,000
Project:
Thai
Year 0:
–$475,000
Year 1:
$225,000
Year 2:
$235,000
Year 3:
$255,000
If Tasty Tuna Corporation’s cost of capital is 10%, what is the NPV of the German project?
a.)$535,797
b.)$563,997
c.)$507,597
d.)$451,198…
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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 $855,614arrow_forwardAnderson International Limited is evaluating a project in Erewhon. The project will create the following cash flows: Year Cash Flow 0 –$591,000 1 221,000 2 164,000 3 229,000 4 208,000 All cash flows will occur in Erewhon and are expressed in dollars. In an attempt to improve its economy, the Erewhonian government has declared that all cash flows created by a foreign company are “blocked” and must be reinvested with the government for one year. The reinvestment rate for these funds is 4 percent. Assume Anderson uses a required return of 12 percent on this project. a. What is the NPV of the project? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What is the IRR of the project? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)arrow_forward"The par-ent of Nester Co. (a U.S. firm) has no international business but plans to invest $20 million in a business in Switzerland. Because the operating costs of this business are very low, Nester Co. expects this business to generate large cash flows in Swiss francs that will be remitted to the parent each year. Nester will finance half of this project with debt. It has these choices for financing the project: ■obtain half of the funds needed from parent equityand the other half by borrowing dollars, ■obtain half of the funds needed from parent equity and the other half by borrowing Swiss francs, or ■obtain half of the funds that are needed from parent equity and obtain the remainder by borrowing an equal amount of dollars and Swiss francs.The interest rate on dollars is the same as the interest rate on Swiss francs. a. Which choice will result in the most exchange rate exposure? b. Which choice will result in the least exchange rate exposure? c. If the Swiss franc were expected to…arrow_forward
- Butler International Limited is evaluating a project in Erewhon. The project will create the following cash flows: Year Cash Flow 0 –$ 1,170,000 1 345,000 2 410,000 3 305,000 4 260,000 All cash flows will occur in Erewhon and are expressed in dollars. In an attempt to improve its economy, the Erewhonian government has declared that all cash flows created by a foreign company are “blocked” and must be reinvested with the government for one year. The reinvestment rate for these funds is 3 percent. If the company uses a required return of 7 percent on this project, what are the NPV and IRR of the project? (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations and round your final answers to 2 decimal places, e.g., 32.16. Enter your IRR answer as a percent.)arrow_forwardAnderson International Limited is evaluating a project in Erewhon. The project will create the following cash flows: Year Cash Flow 0 –$ 1,170,000 1 345,000 2 410,000 3 305,000 4 260,000 All cash flows will occur in Erewhon and are expressed in dollars. In an attempt to improve its economy, the Erewhonian government has declared that all cash flows created by a foreign company are “blocked” and must be reinvested with the government for one year. The reinvestment rate for these funds is 3 percent. If Anderson uses a required return of 7 percent on this project, what are the NPV and IRR of the project? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16. Enter your IRR as a percent.)arrow_forwardThe management of Kawneer North America is considering investing in a new facility and the following cash flows are expected to result from the investment: Year Cash Outflow Cash Inflow 1 $1,900,000 $100,000 2 550,000 200,000 3 360,000 4 480,000 5 510,000 6 600,000 7 590,000 8 300,000 9 250,000 10 250,000 a. what is the payback period of this uneven cash flow? b. does your answer change if year 10's cash inflow changes to $500,000?arrow_forward
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