A major U S clothes manufacturing and distributing company plans to
A major U.S. clothes manufacturing and distributing company plans to expand in Asia. To reduce its transportation costs, it wants to set up its own manufacturing plant in Asia. Two countries are under consideration: China and Indonesia. The expected cash flows from the manufacturing plants in the two countries are as follows:
a. In which country should the U.S. company invest? The spot rate for Chinese yuans and Indonesian rupiahs are CNY 6.82 per USD 1 and IDR 9,699.78 per USD 1, respectively. The inflation rate in China and the United States is expected to be 4 percent and in Indonesia 6 percent during the next five years. The cost of capital of the U.S. company is 10 percent.
b. Suppose that the net present values of both projects are positive and equal.
What are other possible factors that could help the U.S. company make a choice between the two projects?
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