answer these two questions below
1.Your firm is based in southern Ireland (and thereby operates in euro, not pounds) and is considering an investment in the United States.
The project involves selling widgets: you project a sales volume of 50,000 widgets per year, sales price of $20 per widget with a contribution margin of $15 per widget.
The project will last for 5 years, require an investment of $1,000,000 at time zero (which will be depreciated straight-line to $10,000 over the 5 years). If undertaken, the shareholders will contribute $200,000 cash and borrow $800,000 at 5 percent with an interest-only loan with a maturity of 5 years and annual interest payments. Salvage value for the equipment is projected to be $10,000. The project will operate in rented quarters: $300,000 rent is due at the start of each year from year 0 to year 4 as fixed cost.
The corporate tax rate is 12.5 percent in Ireland and 40 percent in the U.S. For simplicity, assume that taxes are paid like sales taxes: immediately. The spot exchange rate is $1.50 = €1.00.
The cost of capital to the Irish firm for a domestic project of this risk (K = rWACC) is 8 percent. i = rDEBT = 5%. Ku = rASSETS = 10%. Kl = rEQUITY = 15.3%. The U.S. risk-free rate is 3 percent; the Irish risk-free rate is 2 percent.
CF0 = -$1,180,000 = $1,000,000 investment + (1 – 0.4) x $300,000 lease payment.
CF1 – 4 = $349,200 = ($1,000,000 – 250,000 – 300,000) x (1 – 0.4) + $198,000 x 0.4
CF5 = 539,200 = ($1,000,000 – 250,000) x (1 – 0.4) + $198,000 x 0.4 + 10,000
a.What is the NPV of the project using the WACC methodology? And the decision?
b.What is the NPV of the project using the APV methodology? And the decision?
2.Assume that interaffiliate cash flows are uncorrelated with one another. Assume that each affiliate will have to make all planned payments before it receives any cash. Under a conservative policy, 3 times of S.D. cash for precautionary purpose as the sufficient cash to cover 99.87% of transactions under either decentralized system or centralized system.
|
Affiliate |
Expected Receipts |
Expected Disbursements |
Standard Deviation |
|
U.S. |
$100,000 |
$140,000 |
$40,000 |
|
Germany |
$150,000 |
$135,000 |
$60,000 |
|
Mexico |
$175,000 |
$125,000 |
$30,000 |
|
Japan |
$200,000 |
$130,000 |
$70,000 |
a.Calculate the sufficient amount of cash for precautionary purpose 1) by the centralized depository.
b.Calculate the sufficient amount of cash for precautionary purpose if depository system is decentralized.
c.Can you confirm that the centralized depository is more beneficial to the company? If so, How?
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