Case - Multinational Capital Budgeting
ParentCo, a U.S. C-Corp, is considering a plant expansion in Guadalajara, Mexico by establishing a wholly owned subsidiary. The CEO of ParentCo has asked you to develop an analysis of whether or not the project should be approved. You and your team have obtained the following data with which to perform your analysis:
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Exchange rate at time of investment
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11 pesos/$
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Cost of investment in $
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$2,000
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Expected inflation in Mexico
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10%
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Expected inflation in US
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3%
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Expected financing
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$1,000 equity from ParentCo; $454.55 loan from ParentCo (5 year fully amort at 10%); remainder from a local Mexican lender, full amort over 8 years at 14%
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ParentCo cost of capital components
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MV debt = 7%; MV equity = 15%; tax rate = 35%; target equity = 60%
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Mexico operation cost of capital components
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MV equity = 24%; tax rate = 30%; target equity = 50%
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Mexico operation terminal growth rate
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3%
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Sales volume
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80 units in year 1, growing at 25% for each of the next 4 years; price fixed at
$6 per unit
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Operating costs
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59% of revenue in year 1; increasing each year by unit growth (no learning curve) and inflation
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Fees paid to parent
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2% of total Mexican revenue
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Annual depreciation
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Equal to 80% of project cost equal over a 10 year period
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Cap X
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Assume future annual cap x equals annual depreciation
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Dividend payment to ParentCo
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50% of Mexican positive net income
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Tax due on payments to ParentCo
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Dividends = 15%; Fees = 10%; Interest
= 10%; Terminal proceeds = 15%
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Tax loss carryovers
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Assume they are not allowed
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Liquidity and marketability discount
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Assume no discount is required
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Project risk premium over ParentCo WACC
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5%
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NWC requirement for project
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240 pesos in year 1, growing at 25% per year
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Deliverable:
1) The Free Cash Flow for each year of the project.
2) The Terminal Value for the project in the terminal year (show calculation)
3) The NPV and IRR for the project
4) The NPV and IRR for the parent
5) Your recommendation of whether the project should be approved by the Parent. What issues beyond NPV and IRR did you consider important when making your decision.
Attachment:- Data.rar