Reference no: EM133127321

Question - PD is an Ireland multinational company that develops and manufactures high-tech biometric devices that recognize finger "digits" when pressed on their patented device reader; hence the company name. PD has developed a new device that is expected to make the company even more successful, as its products continue to replace traditional password protection on all types of devices.

You are employed as a financial manager in the company's oldest Irish plant, adjacent to the company headquarters, and have been asked to perform a financial analysis of a plant modernization program that would allow the Irish plant to produce the new device and continue operating.

The Irish facility has surplus capacity since the company has been shifting production to a newer plant in Singapore in past years. The Singapore plant is not only more modern with a lower cost structure but also benefits from a 15 year tax-free holiday compared to Ireland's 12.5% tax rate. If the Irish project is deemed unprofitable, the Irish plant will be closed and you will lose your job. The job market is expected to remain very bad in Ireland for another 2-3 years, you have no savings and your wife just gave birth to a second child.

You have prepared a preliminary analysis based only on the small amount of incremental new capital investment of $100m needed to modernize the idle Irish equipment that will yield a free cash flow improvement of $300m a year over the next 5 years with a cost of capital of 10%. You are friendly with and have been mentoring a junior finance analyst friend that works in the Singapore plant who has told you informally that the Singapore plant will need to buy new replacement equipment in four years for $500m to maintain its profit on other products. The idle Irish equipment could be redeployed to Singapore today with the same $100m incremental capex to satisfy projected sales of the new device, achieve additional annual cash flows of $20m in Singapore due to its lower costs and taxes net of Irish plant closure costs, maintain Singapore's existing profit base and avoid a future new Singapore equipment investment. However, the Singapore plant operates in its own divisional silo with very little communication and interaction with HQ and HQ will not know of their needed investment until a proposal is made in three years' time.

1. Estimate the expected NPV of just the incremental Irish investment.

2. What are the alternative NPVs if you consider the Singapore situation?