International Financial Management
14th Edition
ISBN: 9780357130698
Author: Madura
Publisher: Cengage
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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.
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
$855,614
Suppose that Kittle Co. is a U.S. based MNC that is considering setting up a subsidiary in Singapore. Kittle would like this subsidiary to produce and sell guitars locally in Singapore, and needs assistance with capital budgeting. The duration of this project is four years, with an initial investment of S$20,000,000 (Singapore dollars).
Kittle Co. managers provide you key information regarding the project.
1.
The government in Singapore will tax any remitted earnings at a rate of 10.00%.
2.
The subsidiary will remit all of it’s after-tax earnings back to the parent.
3.
The forecasted exchange rate of the Singapore dollar over the four-year period is $0.50.
4.
The salvage value is S$12,000,000, which will be paid by the Singapore government in exchange for ownership of the subsidiary after four years.
5.
The required rate of return is 15.00%.
Furthermore, no funds can be remitted from the subsidiary to the parent until the subsidiary is sold for the salvage value at the…
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- Global Electronics Inc. invested $1,000,000 to build a plant in a foreign country. The labor and materials used in production are purchased locally. The plant expansion was estimated to pro-duce an internal rate of return of 20% in U.S. dollar terms. Due to a currency crisis, the currency exchange rate between the local currency and the U.S. dollar doubled from two local units per U.S. dollar to four local units per U.S. dollar. Write a brief memo to the chief financial officer, Tom Greene, explaining the impact that the currency exchange rate change would have on the project’s internal rate of return if (1) the plant produced and sold product in the local economy only, and (2) the plant produced all product locally and exported all product to the United States for sale.arrow_forwardDelta Company, a U.S. MNC, is contemplating making a foreign capital expenditure in South Africa. The initial cost of the project is ZAR13,600. The annual cash flows over the five-year economic life of the project in ZAR are estimated to be 4,280, 5,080, 6,070, 7,060, and 7,900. The parent firm’s cost of capital in dollars is 9.5 percent. Long-run inflation is forecasted to be 3 percent per annum in the United States and 7 percent in South Africa. The current spot foreign exchange rate is ZAR/USD = 3.75. a. Calculating the NPV in ZAR using the ZAR equivalent cost of capital according to the Fisher effect and then converting to USD at the current spot rate. b. Converting all cash flows from ZAR to USD at purchasing power parity forecasted exchange rates and then calculating the NPV at the dollar cost of capital. c. Are the two dollar NPVs different or the same? multiple choice Different Same d. What is the NPV in dollars if the actual pattern of ZAR/USD exchange…arrow_forwardDelta Company, a U.S. MNC, is contemplating making a foreign capital expenditure in South Africa. The initial cost of the project is ZAR11,200. The annual cash flows over the five-year economic life of the project in ZAR are estimated to be 3,360, 4,360, 5,350, 6,340, and 7,300. The parent firm’s cost of capital in dollars is 9.5 percent. Long-run inflation is forecasted to be 3 percent per annum in the United States and 7 percent in South Africa. The current spot foreign exchange rate is ZAR/USD = 3.75. Calculating the NPV in ZAR using the ZAR equivalent cost of capital according to the Fisher effect and then converting to USD at the current spot rate. Converting all cash flows from ZAR to USD at purchasing power parity forecasted exchange rates and then calculating the NPV at the dollar cost of capital. Are the two dollar NPVs different or the same? multiple choice Different Same 4.What is the NPV in dollars if the actual pattern of ZAR/USD exchange rates is: S(0) = 3.75, S(1) =…arrow_forward
- International Foods Corporation, a U.S.-‐based food company, is considering expanding its soup-‐processing operations in Switzerland. The company plans a net investment of $8 million in the project. The current spot exchange rate is SF6.25 per dollar (SF = Swiss francs). Net cash flows for the expansion project are estimated to be SF5 million for 10years and nothing thereafter. Based on its analysis of current conditions in Swiss capital markets, International Foods has determined that the applicable cost of capital for the project is 16 percent. Calculate the net present value of the proposed expansion project.arrow_forwardInternational Foods Corporation, a U.S.-based food company, is considering expanding its soup-processing operations in Switzerland. The company plans a net investment of $7 million in the project. The current spot exchange rate is SF5.25 per dollar (SF = Swiss francs). Net cash flows for the expansion project are estimated to be SF5 million for 12 years and nothing thereafter. Based on its analysis of current conditions in Swiss capital markets, International Foods has determined that the applicable cost of capital for the project is 11 percent. Calculate the net present value of the proposed expansion project. Use Table IV to answer the questions below. Enter your answer in millions. For example, an answer of $1.20 million should be entered as 1.20, not 1,200,000. Round your answer to two decimal places. $arrow_forwardSinTell has USD $24 million in excess cash that it has invested in China at an annual interest rate of 11 percent. The U.S. interest rate is 4 percent. By how much would the Chinese yuan have to depreciate to cause such a strategy to backfire? Give your answer in decimal point, rounding up to 4 decimal places.arrow_forward
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