Using the information in problem # 2, recommend which one of the three alternati

Question

Using the information in problem # 2, recommend which one of the three alternatives, XYZ Corporation should choose, and why? 4. Spartan Inc. (a US based MNC) is planning to open a subsidiary in Switzerland to manufacture shoes. The new plant will cost SF 1.1 billion. The salvage value of the plant at the end of the 4 yr economic life is estimated to be SF 200 million net of any tax effects. This plant will also call for extra inventory holding of SF 300 million, and extra accounts payables of SF 200 million. Projected sales from this new plant are SF 800 million per year. The fixed costs are estimated to be SF 300 million per year, and the variable costs are estimated to be SF 100 million per year. Depreciation on the new plant after accounting for the salvage value will be SF 300 million per year. The Swiss government will impose a 40 % tax on the earnings. US govt. will not impose any taxes. 100% of the cash flows will be remitted to the parent. The exchange rate is expected to be stable at $0.80 per SF. Spartan requires 15 % return on its capital investments. Please compute: a) Net Investment Cost of the plant b) Cash flows in years 1 through 4 of the project c) Net Present Value of the project d) Internal Rate of Return (IRR) of the project e) Should the project be accepted or rejected? Why or why not? f) If the exchange rate scenario unfolds as follows, Re-compute the NPV. Is the project still acceptable? Why or why not? g) If the exchange rate scenario were to unfold as follows, Re-compute the NPV. Is the project still acceptable? Why or why not?

Explanation / Answer

Year 0 $    1,100,000,000 Initial Cost 0 $        -1,200,000,000 0 $        100,000,000 NWC 1 $              360,000,000 $    1,200,000,000 Net Investment Cost 2 $              360,000,000 3 $              360,000,000 salvage value $        200,000,000 4 $              540,000,000 Year 1-3 Year 4 NPV $        -69,292,205.22 Sales $        800,000,000 $ 800,000,000 B2+NPV(15%,B3:B6) VC $        100,000,000 $ 100,000,000 IRR 10.78% FC $        300,000,000 $ 300,000,000 No, NPV is negative and also Depreciation $        300,000,000 $                      -   IRR is lower than req 15% Net Income $        100,000,000 $ 400,000,000 Tax @ 40% $          40,000,000 $ 160,000,000 Income after Tax $          60,000,000 $ 240,000,000 Add: Depreciation $        300,000,000 $                      -   OCF $        360,000,000 $ 240,000,000 Year 4 OCF $ 240,000,000 Add: Salvage value $ 200,000,000 Add: NWC $ 100,000,000 Total OCF 4 $ 540,000,000

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