A.Mama Mia Group, an Italian shoes manufacturer is considering moving some of its operations. Since majority of
Question:
A.Mama Mia Group, an Italian shoes manufacturer is considering moving some of its operations. Since majority of the shoes are exported to Norway, the Italian company wants to open a manufacturing facility there with two-year project period with initial cost of EUR400,000. The operations in Norway would begin in Year 1 and have the following details.
(Note: NOK is a currency code for Norwegian Kroner)
Assumptions
Value
Sales, Year 1 (NOK)
7,000,000
Annual growth of sales
3.00%
Variable Cost, Year 1 (NOK)
300,000
Annual growth of variable cost
5.00%
Depreciation expenses per year (NOK)
150,000
Mama Mia's WACC
10.00%
Corporate Tax in Italy
20%
Corporate Tax in Norway
22%
Remittance Tax in Italy
2%
Remittance Tax in Norway
3%
Spot Rate, Year 0
NOK10/EUR
The operations in Norway will pay 70% of its accounting profit to Mama Mia Group as an annual cash dividend. %. Long-run inflation is forecasted to be 2% per annum in the Norway and 4% in Italy. Assume that the purchasing power parity hold, calculate the NPV in EUR of this project from the perspective of parent company.
Fundamentals of Multinational Finance
ISBN: 978-0205989751
5th edition
Authors: Michael H. Moffett, Arthur I. Stonehill, David K. Eiteman