Brussels Mustard Company Wail of Belgium has been exporting French-style mustard to the United States for many years and has (level, opal a good reputation. Costs within the European Union have now risen So that BMC is no longer price competitive in the United States. Hence, it is considering purchasing an existing U,S. timid factory and converting it hut) a manufacturing plant for the U.S. If purchased. the new wholly owned subsidiary will have the following attributes:
• The initial' (t =1) sales price per container will tomtit% $20.
• First-year production and sales will be 1 million containers per year, and physical sales will grow at 10e!, per annum for the first three years and then stabilize never. First-year production costs will be $15 per container. Administrative costs kill he Si million per year1 and depredation will be SI million per year.
• Prices and costs in future years will rise with U.S, inflation as follows:
a. 4,00% p.a. for raw material sand labor
b. 3.00% p.a. for sales prices
c. No change for administrative costs or depreciation
• BMC use 15% for its weighted average cost of capital.
• The value of the U.S. factory to BMC at the end of the third year is assumed to be equal to an infinite stream of third-year dividends, discounted at 20% p.a. The higher discount rate is because tithe perceived greater risk in the future.
• Production is for sale. Hence production volume equals sales volume, All sales are for cash.
• Corporate tax rate in the United States: 35%; Corporate tax rate in Belgium: 40%
• Current and expected exchange rate' are:
t1= $1.1000/€.
T2 = $1.20004:
t3= $1.3000/C
•BMC plans to have its U.S. subsidiary pay 80% of its profit back to the parent.
What is the maximum U.S. purchase price BMC can afford to pay back the U.S. affiliate?