Question: Hermosa Components: Revenue Growth and Sales Price Scenario. In addition to the assumptions employed in problem II, Hermosa now wishes to evaluate the prospect of being able to sell the Argentine subsidiary at the end of year 5 at a multiple of the business's earnings in that year. Hermosa believes that a multiple of six is a conservative estimate of the market value of the firm at that time. Evaluate the project and parent viewpoint capital budgets.
Problem II: Hermosa Components: Revenue Growth Scenario. As a result of their analysis in problem I, Hermosa wishes to explore the implications of being able to grow sales volume by 4% per year. Argentine inflation is expected to average 5% per year, so sales price and material cost increases of 7% and 6% per year, respectively, are thought reasonable. Although material costs in Argentina are expected to rise, U.S.- based costs are not expected to change over the 5-year period. Evaluate this scenario for both the project and parent viewpoints. Is the project under this revenue growth scenario acceptable?
problem I: Hermosa Components: Baseline Analysis. Evaluate the proposed investment in Argentina by Hermosa Components (U.S.). Hermosa's management wishes the baseline analysis to be performed in U.S. dollars (and implicitly also assumes the exchange rate remains fixed throughout the life of the project). Create a project viewpoint capital budget and a parent viewpoint capital budget. What do you conclude from your analysis?