The document outlines a group project with three parts: 1) a capital budgeting analysis to determine the most feasible country for a new manufacturing subsidiary between two potential countries, requiring estimates of demand, costs, taxes, exchange rates, and NPV calculations; 2) a country risk analysis using political and economic factors; and 3) an analysis of the balance of payments for each country, including whether their trade balance is in surplus or deficit and their type of balance of payments situation.
The document outlines a group project with three parts: 1) a capital budgeting analysis to determine the most feasible country for a new manufacturing subsidiary between two potential countries, requiring estimates of demand, costs, taxes, exchange rates, and NPV calculations; 2) a country risk analysis using political and economic factors; and 3) an analysis of the balance of payments for each country, including whether their trade balance is in surplus or deficit and their type of balance of payments situation.
The document outlines a group project with three parts: 1) a capital budgeting analysis to determine the most feasible country for a new manufacturing subsidiary between two potential countries, requiring estimates of demand, costs, taxes, exchange rates, and NPV calculations; 2) a country risk analysis using political and economic factors; and 3) an analysis of the balance of payments for each country, including whether their trade balance is in surplus or deficit and their type of balance of payments situation.
The document outlines a group project with three parts: 1) a capital budgeting analysis to determine the most feasible country for a new manufacturing subsidiary between two potential countries, requiring estimates of demand, costs, taxes, exchange rates, and NPV calculations; 2) a country risk analysis using political and economic factors; and 3) an analysis of the balance of payments for each country, including whether their trade balance is in surplus or deficit and their type of balance of payments situation.
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Information about the Group Project
Your project has three parts:
1. Capital Budgeting Analysis Consider yourself as a Financial Manager working in a MNC that has the head office in France. You are contemplating on establishing a foreign subsidiary. The subsidiary company should be in a country that has a different currency. As your parent company is in France (euros), your subsidiary company could be in countries such as Thailand (Thai Bhat), the Mexico (Mexico Peso), or Japan (JPY Yen). Next, assume that you want to manufacture and sell a product in a foreign country through your subsidiary company. You are sure about the region to lunch the MNC’s international project, but within that region, there are two potential countries in your mind that can fulfill your purpose. The subsidiary in each country should be conducting business for three years only (i.e., 2023, 2024, and 2025) and the project should be terminated at the end of third year. You need to estimate the following items for your project. Use the real data sources (provide references) and consider the actual economic conditions of the country to make accurate estimates. I. Demand of the product (e.g., economic conditions) II. Price of the product (e.g., the competitors’ price, Cost plus Margin) III. Variable costs per unit (e.g., material cost, machine hours, labor hours) IV. Fixed cost V. Depreciation expense on the assets that you bought as an initial investment (e.g., Straight line method = Cost – SV / Useful life) VI. Corporate tax in the host country VII. Withholding tax on remitted funds VIII. Salvage value (20% of the initial investment) IX. Exchange rate (inflation, interest rate, national income level) X. Discount rate (risk free rate on T-bills of foreign country + risk premium) XI. Initial investment (10,000,000 euros). After you estimate all the items, calculate the Cumulative NPV using the discount rate. Decide which country is more feasible for launching this project. Next, apply sensitivity analysis on the cumulative NPV by considering the different scenarios of the following items. I. Exchange Rate II. Hedge Vs Non-Hedge Cash flows III. Blockage of Funds by the host govt. and re-investment of cash flows IV. Salvage Value V. Withholding Tax by the host Govt. VI. Interest rates on foreign loans if money is borrowed from the local bank VII. Discount rate
For example, in order to check the sensitivity of NPV to exchange rate fluctuations, take different inputs of the exchange rate (e.g., Stable exchange rate, appreciating exchange rate, depreciating exchange rate). All calculations should be done in spread sheet. Use a separate spread sheet for each type of analysis.
2. Country Risk Analysis
I. Use checklist approach for conducting country risk analysis of both countries. II. Consider at least five political factors and five financial factors for this analysis. III. The factors should be based on the current real situation of the country.
3. Balance of payment
I. Demonstrate the balance of payment of each country for the year 2022. (See figure 1 below for reference). II. Discuss whether the balance of payment of your country has surplus balance of trade or deficit balance of trade (i.e., compare imports Vs. exports). III. Elaborate whether your country has Type-1, Type-2, and Type-2 balance of payment. (See figure 2 below for reference). Exports: Goods 153072 Services 15738 Imports: Goods 132609 Services 24316 Other - Investment Income -328000 Investment Payments 45000 Miscellaneous: Current Account balance: -173000 Capital Account Balance: - Financial Account: Direct Investment Abroad - 52000 Direct Investment in Vietnam 257000 Net reduction in holding of foreign portfolio assets - Portfolio Investment in Vietnam 207000 Net Other Investment -109000 Derivatives -1000 Reserves Increase Financial Account Balance: 298000 Net errors and omissions - 10000 Current + Capital + Financial + Errors: 116000
