Suppose GM is considering buying a plant in Hungary. All sales will be to Hungarian customers and denominated in forints. The projected returns and investments are as follows:
Purchase price 30 billion forints
Additional investment $50 million, all imported from U.S.
Projected Hungarian sales 45 billion forints
Projected earnings 4.5 billion forints
Exchange rate 300 forints/$
a) What is the total investment in dollars?
b) Once the plant is up and running, what is the annual percentage return on investment?
c) If the forint is devalued 25%, what is the new exchange rate?
d) If this 25% devaluation was made after the purchase and additional investment were completed, what is the new ROI?
e) Instead of selling to the Hungarian market only, suppose all sales were exports, priced in hard currency ($), yielding the same 4.5 billion forints earnings (at the original 300 forints/$ exchange rate.) If the 25% devaluation now occurred, what would happen to the plant’s profit margins?