ABC Inc. is a US company that is considering moving its manufacturing facility toMexico. The Mexican subsidiary manufactures toys for kids which will be sold toMexican households in big cities. The cost to purchase and equip the facility is20,000,000 Mexican pesos. The company's production, administrative and salesdepartment have supplied the estimates of earnings and annual changes in net workingcapital, interest rates in Mexico and the US, the current peso/dollar exchange rate asfollows:yearUS interest rateMexico's interest ratePesos per dollarInitial investmentEBITChange in net working capitalCapital expenditureUnit: Mexican Peso018-20,000,0001231.50%1.50%1.50%7.25% 7.25% 7.25%100,000 140,000 948,000250,000 40,000 40,00000Perform an NPV analysis to determine whether this is a good investment, under thefollowing assumptions:a) The peso/dollar exchange rate is currently 18pesos/$, and the peso is expectedto appreciate/depreciate at a rate justified by the expected basic interest ratedifferential between Mexico and the United States.b) Depreciation of the fixed assets worth 20,000,000 peso initially invested in year0 will be taken on a straight-line basis over 20 years.c) The Mexico corporate income tax rate is 30%, and there is a 10% withholding taxon dividends payments.d) The dollar-denominated discount rate for the project is 15%.e) All the Mexican subsidiary's free cash flows will be paid to the US parent asdividends.f) All earnings repatriated to the US are subject to the US Tax Cuts and Jobs Act2017.g) After year 3, the dollar free-cash flows for the US parent will grow at a constantrate of 1% per year forever.

If there is a constant growth rate from year 4 onwards, then the terminal value with the constant…

Inc. is ad ing Mexico. The Mexican subsidiary manufactures toys for kids which will be sold to Mexican households in big cities. The cost to purchase and equip the facility is 20,000,000 Mexican pesos. The company's production, administrative and sales department have supplied the estimates of earnings and annual changes in net working capital, interest rates in Mexico and the US, the current peso/dollar exchange rate as follows: year US interest rate Mexico's interest rate Pesos per dollar Initial investment 0 18 -20,000,000 1 1.50% 7.25% 2 3 1.50% 1.50% 7.25% 7.25%

Inc. is ad ing Mexico. The Mexican subsidiary manufactures toys for kids which will be sold to Mexican households in big cities. The cost to purchase and equip the facility is 20,000,000 Mexican pesos. The company's production, administrative and sales department have supplied the estimates of earnings and annual changes in net working capital, interest rates in Mexico and the US, the current peso/dollar exchange rate as follows: year US interest rate Mexico's interest rate Pesos per dollar Initial investment 0 18 -20,000,000 1 1.50% 7.25% 2 3 1.50% 1.50% 7.25% 7.25%

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter17: Activity Resource Usage Model And Tactical Decision Making

Section: Chapter Questions

Problem 14E: Global Reach, Inc., is considering opening a new warehouse to serve the Southwest region. Darnell...

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