vishal mittal
Vishal Mittal
1) Metro Allied Motors(MAM) is a multinational motor manufacturing company headquartered in Chicago(USA).MAM is considering the establishment of a new manufacturing facility in a Argentina. Key details for the new project are as follows:
a)The capital cost of buildings, plant and machinery is estimated to be 120 million pesos. An investment of 20 million pesos has to be made for working capital. The investments are to be made at the end of year 0. The project is expected to have a life of 7 years. The fixed assets are expected to have a salvage value of 30 million pesos at the end of the seventh year. Argentina’s tax rules allow such costs to be written off over a five year accounting period using the straight-line method of depreciation.
b)The expected units to be sold are as follows:
Years Units Selling Price per unit in ARS(Argentine pesos)
Year 1 20,000 3000
Year 2 24,000 3300
Year 3 30,000 3500
Year 4 32,000 3900
Year 5 36,000 4200
Year 6 40,000 4500
Year 7 40,000 4900
A vital component of the motor can be manufactured only in US. This component will be transferred to the Argentine Subsidiary by the parent company in USA at a price of 150 $ per component. This price will rise in line with US inflation.
The variable cost per unit in the Argentine subsidiary(excluding the motor component prices from USA) is expected to be 30% of the selling price in pesos. The fixed costs are expected to be 2 million pesos at the end of year 1.The fixed costs will rise in line with the inflation rate in Argentina.
A royalty cost of 5% on sales will have to be paid by the MAF subsidiary.
Argentina charges a corporate tax of 30% and a 10% withholding tax .The corporate tax rate in USA is 35%. The year 0 exchange rate is 4 ARS(Argentine pesos)= 1 $. The inflation rate in US is 6% and inflation rate in Argentina is 9%.Assume that the inflation rates are expected to remain the same over the next seven years .Future movements in currency values are expected to follow purchasing power parity.
If the manufacturing plant is Argentina is not established, the company’s existing facilities in USA could have been used to manufacture more motor components which could have been sold to a buyer in the USA. The units that could have been sold are as follows:
Years Units
Year 1 2,000
Year 2 2,400
Year 3 3,000
Year 4 3,300
Year 5 3,500
Year 6 4,000
Year 7 4,200
These could have been sold at a price of 180 $ per unit at the end of year 1. These prices would have risen in line with the inflation rate in USA.
MAM expects a return of 12% on capital employed and uses the NPV method to appraise international capital budgeting projects. Should the project be accepted?
a)The capital cost of buildings, plant and machinery is estimated to be 120 million pesos. An investment of 20 million pesos has to be made for working capital. The investments are to be made at the end of year 0. The project is expected to have a life of 7 years. The fixed assets are expected to have a salvage value of 30 million pesos at the end of the seventh year. Argentina’s tax rules allow such costs to be written off over a five year accounting period using the straight-line method of depreciation.
b)The expected units to be sold are as follows:
Years Units Selling Price per unit in ARS(Argentine pesos)
Year 1 20,000 3000
Year 2 24,000 3300
Year 3 30,000 3500
Year 4 32,000 3900
Year 5 36,000 4200
Year 6 40,000 4500
Year 7 40,000 4900
A vital component of the motor can be manufactured only in US. This component will be transferred to the Argentine Subsidiary by the parent company in USA at a price of 150 $ per component. This price will rise in line with US inflation.
The variable cost per unit in the Argentine subsidiary(excluding the motor component prices from USA) is expected to be 30% of the selling price in pesos. The fixed costs are expected to be 2 million pesos at the end of year 1.The fixed costs will rise in line with the inflation rate in Argentina.
A royalty cost of 5% on sales will have to be paid by the MAF subsidiary.
Argentina charges a corporate tax of 30% and a 10% withholding tax .The corporate tax rate in USA is 35%. The year 0 exchange rate is 4 ARS(Argentine pesos)= 1 $. The inflation rate in US is 6% and inflation rate in Argentina is 9%.Assume that the inflation rates are expected to remain the same over the next seven years .Future movements in currency values are expected to follow purchasing power parity.
If the manufacturing plant is Argentina is not established, the company’s existing facilities in USA could have been used to manufacture more motor components which could have been sold to a buyer in the USA. The units that could have been sold are as follows:
Years Units
Year 1 2,000
Year 2 2,400
Year 3 3,000
Year 4 3,300
Year 5 3,500
Year 6 4,000
Year 7 4,200
These could have been sold at a price of 180 $ per unit at the end of year 1. These prices would have risen in line with the inflation rate in USA.
MAM expects a return of 12% on capital employed and uses the NPV method to appraise international capital budgeting projects. Should the project be accepted?