Problem:
Conduct your own capital budgeting analysis. Often finance professionals conduct analysis on projects only to have conditions change, and subsequently impacting their analysis. There is value in doing "what if" scenarios when evaluating projects. Review the attached (Provided in Excel).
After you have reviewed the excel spreadsheet, analyze the data provided as well as evaluate the impact of changes in conditions on the NPV of an anticipated project. The firm, U.S. Globalco, is evaluating whether or not to open a manufacturing subsidiary within the EU. The new facilities will cost €100 million and is expected to have a useful life of 10 years with a salvage value of €10 million. Other assumptions regarding growth in sales, expenses, etc. are also provided. As can be seen in the calculations, the NPV for this project is in fact positive and should be undertaken.
Based on the calculations, please answer the following questions:
- What is the revised NPV for this project if U.S. Globalco's required rate of return, the discount rate, is 20% instead of 15%? Why is NPV impacted this way? Why might a company such as Globalco decide a higher required rate of return is warranted?
- What is the revised NPV for this project (using the higher discount rate) if the Euro to dollar exchange rate becomes US$0.90/€1? Why is NPV impacted in this manner? What steps might U.S. Globalco take to mitigate the impacts of these changes to its original projections?
- What is the impact on NPV (using the depreciated value of the euro and the higher discount rate) if the host country for this project lowers its tax rate to 25% and lowers the withholding tax to 8%? Why might the host country government make such changes? What might it be hoping to accomplish?
- What conclusions do you reach regarding the inter-play of variables in evaluating FDI and in assessing MPV?
Additional Information:
This question is from Finance and it is about conducting capital budgeting analysis for a US firm named Globalco. The financial information pertaining to Globalco has been given in Excel sheets and interpretations on NPV calculations have been given in the solution.