Problem 1: DFI Strategy. J.C. Penney has recognized numerous opportunities to expand in foreign countries and has assessed many foreign countries and has assessed many foreign markets, including Brazil, Greece, Mexico, Portugal, Singapore, and Thailand. It has opened new stores in Europe, Asia, and Latin America. In each case, the firm was aware that it did not have sufficient understanding of the culture of each country that it had targeted. Consequently, it engaged in joint ventures with local partners who knew the preferences of the local customers.
a. What comparative advantage does J.C. Penney have when establishing a store in a foreign country, relative to an independent variety store?
b. Why might the overall risk of J.C. Penney decrease or increase as a result of its recent global expansion?
c. J.C. Penny has been more cautious about entering China. Explain the potential obstacles associated with entering China.
Problem 2: Capital Budgeting Example. Brower, Inc., just constructed a manufacturing plant in Ghana. The Construction cost 9 billion Ghanian cedi. Brower intends to leave the plant open for 3 years. During the three years of operation, cedi cash flows are expected to be 3 billion cedi, 3billion cedi, and 2 billion cedi, respectively. Operating cash flows will begin one year from today and are remitted back to the parent at the end of each year. At the end of the third year, Brower expects to sell the plant for 5 billion cedi. Brower has required a rate of return of 17%. It currently takes 8,700 cedi to buy one U.S. dollar, and the cedi is expected to depreciate by 5 percent per year.
a. Determine the NPV for this project. Should Brower build the plant?
b. How would your answer change if the value of the cedi was expected to remain unchanged from its current value 8,700 cedi per U.S. dollar over the course of three years? Should Brower construct the plant then?