Home / Questions / International Capital Budgeting (16 point) FMC Inc. is a U.S. manufacturing company. It i
International Capital Budgeting (16 point)
FMC Inc. is a U.S. manufacturing company. It is considering an investment in a plant in France, a market which has up to now been served by exports from U.S. plants. The international finance group of FMC has projected sales, after-tax profits (in France), and the exchange rate for the proposed French plant for the next 5 years as follows:
Year Sales Operating Expenses Exchange Rate ($/euro)
0 $1.10
1 €30 mil €12 mil $1.10
2 40 16 $1.10
3 50 20 $1.10
4 60 24 $1.10
5 70 28 $1.10
The U.S. parent would make an initial investment of €60 mil to build and equip the plant. The firm anticipates that they will sell the plant at the end of the five years for €10 mil. Depreciation is straight-line to a value of euro 0 over the 5-year life of the equipment, which is equivalent to €12 mil/year. The French tax rate is 40%. Assume that all free cash flows will be repatriated to the parent. FMC uses a cost of capital of 20% on investments of this nature.
Do a NPV and IRR analysis from the parent viewpoint to decide whether the project should be accepted or not.
How would your answer change if Euro depreciates by 5% every year? Compare (1) and (2) and discuss the impact of a weaker Euro on the NPV of the project.
In order to reduce the exchange rate exposure, FMC uses forward contract to hedge 15 million euro every year. The one-year through five-year forward rate is the same as $1.03. Assume Euro depreciates by 5% in the spot market every year, what is the new NPV after hedging? Compare (2) and (3) and discuss the benefits of hedging.
Assume that funds are blocked until the subsidiary is sold. The funds to be remitted are reinvested at a rate of 8 percent (after taxes) until the end of Year 3. How is the project NPV affected? Assume euro depreciates by 5% in the spot market every year. Compare (1) and (4), discuss the impact of block funds.
Dec 04 2019 View more View Less
A random sample of n elements is taken from a population of size N without replacement. What is the probability that a fixed element of the population is included? Simpli...
Aug 03 2020If find the gradient and use it to find the tangent line at the level curve at the point . Sketch the level curve,tangent line and gradient vector.
Jun 14 2021Compute for the EAIT.EAIT= PAnswerb. Compute for the dividends for preferred shares; for common shares.Preferred Shares= PAnswerCommon Shares= PAnswerc. How much of the E...
Dec 06 2019For fraud to occur, three things must exist. Identity the three things.8) Identify each of the following as an example of perceived opportunity, rationalization, and per...
Dec 26 2019What is the major part of the task of personal selling?
May 09 2021Show that the harmonic series diverges.
Jun 18 2021Ralph and Tina (husband and wife) transferred taxable bonds worth $30,000 to Pam, their 12-year-old daughter. Pam received $3,500 of interest on the bonds in the curren...
Mar 28 2020The functional structure that best supports the organization(B)Pay for performance(C)The use of rewards (intrinsic and extrinsicDocument Preview:create a 200-300 word res...
Jul 30 2020is a symbol for ___________ gate? (a) NOR (b) XOR (c) XNOR (d) NAND (e) OR.
Jan 11 2018Explain why people may make unethical decisions. How can a firm ensure that the people who work for it make ethical decisions? 99.Name at least two examples of ethical...
Dec 14 2019