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