What issues beyond npv and irr did you consider

Reference no: EM131036104

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:

Exchange rate at time of investment	11 pesos/$
Cost of investment in $	$2,000
Expected inflation in Mexico	10%
Expected inflation in US	3%
Expected financing	$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%
ParentCo cost of capital components	MV debt = 7%; MV equity = 15%; tax rate = 35%; target equity = 60%
Mexico operation cost of capital components	MV equity = 24%; tax rate = 30%; target equity = 50%
Mexico operation terminal growth rate	3%
Sales volume	80 units in year 1, growing at 25% for each of the next 4 years; price fixed at $6 per unit
Operating costs	59% of revenue in year 1; increasing each year by unit growth (no learning curve) and inflation
Fees paid to parent	2% of total Mexican revenue
Annual depreciation	Equal to 80% of project cost equal over a 10 year period
Cap X	Assume future annual cap x equals annual depreciation

Dividend payment to ParentCo	50% of Mexican positive net income
Tax due on payments to ParentCo	Dividends = 15%; Fees = 10%; Interest = 10%; Terminal proceeds = 15%
Tax loss carryovers	Assume they are not allowed
Liquidity and marketability discount	Assume no discount is required
Project risk premium over ParentCo WACC	5%
NWC requirement for project	240 pesos in year 1, growing at 25% per year

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

Reference no: EM131036104

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