Question

In: Finance

When a manufacturing company decides to build a plant in a foreign country, the company is...

When a manufacturing company decides to build a plant in a foreign country, the company is often able to get regions of the country to compete for the jobs that will be brought to the area. The governments and municipalities of these regions will often offer subsidies in the form of below-market rate financing. Consider this hypothetical example. You are evaluating a project based in Zimbabwe. Currently Zimbabwe does NOT have their own currency and the USD is used for all payments. The project will generate $15M after-tax cashflows per year for 10 years (Y1-Y10). Your cost of capital (WACC) is 10%, the cost of debt is 5%, and the tax rate is 20%. The project requires an initial investment of $50M in Year 0. You are planning to fund the project with $20m equity and 30M debt (the debt must be repaid in 10 equal installments). The Zimbabwean government is offering to lend you $30M at 3% (the loan must be repaid in 10 equal installments). Compute the NPV of the project. (hint: carefully consider the tax shield implications). Please include a table with all relevant cashflows and describe your calculations in detail.

Solutions

Expert Solution

Total present value of all future cash flows
add all present values from year 1 to 10 = 89.392595mn
Out flow = 50mn
NPV = 89.39 - 50 = 39.39mn (approx)

Related Solutions

Granite Manufacturing Company is going to hire a contractor to build a new manufacturing plant in...
Granite Manufacturing Company is going to hire a contractor to build a new manufacturing plant in Connecticut.   The Company comes to you for advice regarding what sales and use tax exemptions would be available to them in constructing the new plant. The manufacturing complex will include a separate building for research and development. What advice can you give them? Identity possible savings in their purchases.  
a. When would it be a good idea to outsource your manufacturing to a foreign Country?...
a. When would it be a good idea to outsource your manufacturing to a foreign Country? b. When would it be an absolutely bad time to outsource your manufacturing to a foreign Country. What I am looking for here is what situations at a company might cause you to consider going offshore? Provide some concrete examples to strengthen the questions (500-800 words)
QWY company is looking to build a manufacturing plant overseas. Project = 5yrs The cost of...
QWY company is looking to build a manufacturing plant overseas. Project = 5yrs The cost of the land for this project is £6,500,000. The land can be sold for £4,500,000 in five years’ time, irrespective of what is built on it (ignore taxes). The manufacturing plant will cost £15,000,000. The company uses straight line method of depreciation and predicts to sell the plant for £5,000,000 (ignore taxes) at the end of the project. The expectation from the project is to...
A seaside community, with a population of 250,000 people, decides to build a seawater desalination plant...
A seaside community, with a population of 250,000 people, decides to build a seawater desalination plant to supply all of their water needs (approximately 70 liters of water per day per person). The proposed design models seawater entering the desalination plant as a 3.5% salt solution by mass, with a density of 1.029 kg per liter and an average temperature of 15°C. A concentrated brine (18.5% salt solution by mass) is discharged to the ocean as waste and the treated...
A company is planning a plant expansion. They can build a large or small plant. The...
A company is planning a plant expansion. They can build a large or small plant. The payoffs for the plant depend on the level of consumer demand for the company's products. For the large plant, the company expects $90 million in revenue if demand is high and $40 million if demand is low. For the small plant, the company expects $55 million in revenue if demand is high and $20 million if demand is low. The cost of the large...
The Nature and Wildlife Corporation has manufacturing facilities in country A and an assembly plant in...
The Nature and Wildlife Corporation has manufacturing facilities in country A and an assembly plant in country B. In June 2017, the company will ship 1,000 units with a production cost of $65 per unit to it's plant in country B. It's operating expenses in country A are $15,000 for the month. The income tax rate in country A is 20% and in country B it is 40%. The company plans to have a transfer price of $100 per unit....
The Nature and Wildlife Corporation has manufacturing facilities in country A and an assembly plant in...
The Nature and Wildlife Corporation has manufacturing facilities in country A and an assembly plant in country B. In June 2017, the company will ship 1,000 units with a production cost of $65 per unit to its plant in country B. Its operating expenses in country A are $15,000 for the month. The income tax rate in country A is 20% and in country B it is 40%. The company plans to have a transfer price of $100 per unit....
When the government of Tradeland decides to impose arn import quota on foreign cars, three proposals...
When the government of Tradeland decides to impose arn import quota on foreign cars, three proposals are sug gested: (1) Sell the import licences in an auction. (2) Distribute the licences randomly in a lottery. (3) Let peo- ple wait in line and distribute the licences on a first- come, first-served basis. Compare the effects of these policies. Which policy do you think has the largest deadweight losses? Which policy has the smallest deadweight losses? Why? (Hint: the government's other...
Assume a two country (home and foreign) and a two good (agricultural good and manufacturing good)...
Assume a two country (home and foreign) and a two good (agricultural good and manufacturing good) model. Suppose that labor (only mobile factor) is used in both the industries, but land is specific to agriculture, and capital is specific to manufacturing. Use the specific factors model to briefly explain the existence of sweatshops in the foreign country that has a comparative advantage in the agricultural good.
. When determining whether a particular proposed project in a foreign country is creating value for...
. When determining whether a particular proposed project in a foreign country is creating value for the shareholders, we need to: a. make sure the project has a positive NPV. b. make sure the project has a foreign currency IRR that is greater than the foreign cost of capital. c. make sure the project has a domestic currency IRR that is greater than the domestic cost of capital. d. All of the above. e. None of the above.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT