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)
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.
An electronic package with a surface area of 1 m2 placed in an orbiting space station is exposed to space. The electronics in this package dissipate all 1 kW of its power...Jul 22 2020
Suppose that a delivery company currently uses one employee per vehicle to deliver packages. Each driver delivers 50 packages per day, and the firm charges $20 per packa...Dec 05 2019
What type of investors will now have proxy access to nominate their own candidates for the board of directors? A. Shareholders who hold at least 3% ownership for at lea...Jan 09 2020
Zenith Corporation acquired 70 percent of Down Corporation’s common stock on December 31, 20X4, for $102,200. The fair value of the noncontrolling interest at that date w...Jul 09 2020
Credit terms of 1/10, n/30 mean thatA) 1% discount is allowed if the bill is paid within 10 days, or the entire amount is due within 30 days.B) a discount is allowed if ...Dec 06 2019
How I recorded the following transactions in general journal for BM, Inc. Include with a brief explanation of the transactions as part of each journal entry.sept 1 the BM...Sep 12 2020
Wonder Line (WL) operates a megastore featuring sports merchandise. It uses an EOQ decision model to make inventory decisions. It is now considering inventory decisions f...Jul 14 2020
Analyzing Transactions Using the Financial Statement Effects Template On March 1, S. Penman launched AniFoods Inc., an organic foods retailing company. Following are the...Mar 26 2020
Suppose a company accountant incorrectly classified advertising costs as a product cost. What impact would this have on the company’s financial statements?Apr 14 2020
If production remains the same and all prices rise by 50%, then real GDP B) and nominal GDP are both constant C) is constant and nominal GDP is increased by half.May 04 2020
Welcome to MyCourseHelp Services, World's leading Academic solutions provider with Millions of Happy Students.