Big Wacky Motors (BWM), a manufacturer of traditional North American-style spacious cars, is considering constructing a...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Big Wacky Motors (BWM), a manufacturer of traditional North American-style spacious cars, is considering constructing a factory in Germany. The initial cash outlay in Year 0 consists of two parts, a 7 million investment in the foreign factory (note, in euros) and a domestic administrative cost of $6 million (note, in dollars). The project is expected to produce revenues of 20 million in each of Years 1 and 2; see Rows (i)-(ii) of the Assumptions exhibit below. The variable costs would be 50% of the revenues. The 7 million investment in the factory is depreciated in euros over 5 years by the straight- line method. At the end of Year 2, the firm plans to sell the factory at the price, after all taxes, equal to its net book value. The firm's marginal tax rate is 30% in Germany and 40% in its home country. Foreign credits are available between the two countries. The current spot rate is shown in Year 0 of Row (iii). Also given below are the interest and inflation rates of the two currencies. In all present-value calculations, convert the foreign-currency cash flows into dollars before discounting. Ignore irrelevant information. Answer Parts a)-k) below. Interest rate Inflation rate Assumptions (i) Initial domestic cost (SM) (ii) Investment/Revenues (EM) (iii) Exchange rate ($/) Income Statement (SM) (A) Initial domestic cost (B) Investment/Revenues (C) Less variable costs (D) Less depreciation S 0.02 (-2.0%) 0.01 (-1.0%) (E) Earnings before taxes (EBT) (F) Less income taxes (G) Net income (NI) Year Year Sale value (EM) Sale value (SM) 0.06 (-6.0%) 0.04 (-4.0%) 0 -$6 -7 $1.400 0 -$6 -$9.80 0.5 (-50%) (=0%) Year 1 20 i 1 0 $0.00 $0.00 $0.000 2 20 2 $0.00 a) Project viewpoint. In Row (iii) of the Assumptions exhibit above, use the Uncovered Interest Rate Parity (UIRP) to forecast the exchange rates in Years 1 and 2. In what follows, use these rates to convert euro cash flows to dollars. All the cash flows in the subsequent Income Statement should be signed in millions of dollars. For example, cash flows in deduction rows starting with "Less" should be negative. $0.00 b) In Row (D) above, convert the annual depreciation in euros to dollars for Years 1 and 2 (again, they should be negative numbers). $0.000 c) Enter the tax rate for the project viewpoint in the first box in Row (F) as a fraction (e.g., type 0.1 for 10%), and compute the tax payments in Years 1 and 2 as negative numbers in the remaining empty boxes. d) Compute the after-tax sale value of the factory in millions of euros in the empty box below. It will be converted to dollars automatically in the subsequent cell. 2 $0.000 Big Wacky Motors (BWM), a manufacturer of traditional North American-style spacious cars, is considering constructing a factory in Germany. The initial cash outlay in Year 0 consists of two parts, a 7 million investment in the foreign factory (note, in euros) and a domestic administrative cost of $6 million (note, in dollars). The project is expected to produce revenues of 20 million in each of Years 1 and 2; see Rows (i)-(ii) of the Assumptions exhibit below. The variable costs would be 50% of the revenues. The 7 million investment in the factory is depreciated in euros over 5 years by the straight- line method. At the end of Year 2, the firm plans to sell the factory at the price, after all taxes, equal to its net book value. The firm's marginal tax rate is 30% in Germany and 40% in its home country. Foreign credits are available between the two countries. The current spot rate is shown in Year 0 of Row (iii). Also given below are the interest and inflation rates of the two currencies. In all present-value calculations, convert the foreign-currency cash flows into dollars before discounting. Ignore irrelevant information. Answer Parts a)-k) below. Interest rate Inflation rate Assumptions (i) Initial domestic cost (SM) (ii) Investment/Revenues (EM) (iii) Exchange rate ($/) Income Statement (SM) (A) Initial domestic cost (B) Investment/Revenues (C) Less variable costs (D) Less depreciation S 0.02 (-2.0%) 0.01 (-1.0%) (E) Earnings before taxes (EBT) (F) Less income taxes (G) Net income (NI) Year Year Sale value (EM) Sale value (SM) 0.06 (-6.0%) 0.04 (-4.0%) 0 -$6 -7 $1.400 0 -$6 -$9.80 0.5 (-50%) (=0%) Year 1 20 i 1 0 $0.00 $0.00 $0.000 2 20 2 $0.00 a) Project viewpoint. In Row (iii) of the Assumptions exhibit above, use the Uncovered Interest Rate Parity (UIRP) to forecast the exchange rates in Years 1 and 2. In what follows, use these rates to convert euro cash flows to dollars. All the cash flows in the subsequent Income Statement should be signed in millions of dollars. For example, cash flows in deduction rows starting with "Less" should be negative. $0.00 b) In Row (D) above, convert the annual depreciation in euros to dollars for Years 1 and 2 (again, they should be negative numbers). $0.000 c) Enter the tax rate for the project viewpoint in the first box in Row (F) as a fraction (e.g., type 0.1 for 10%), and compute the tax payments in Years 1 and 2 as negative numbers in the remaining empty boxes. d) Compute the after-tax sale value of the factory in millions of euros in the empty box below. It will be converted to dollars automatically in the subsequent cell. 2 $0.000
Expert Answer:
Answer rating: 100% (QA)
a To forecast the exchange rates in Years 1 and 2 using the Uncovered Interest Rate Parity UIRP we n... View the full answer
Related Book For
Managerial accounting
ISBN: 978-0471467854
1st edition
Authors: ramji balakrishnan, k. s i varamakrishnan, Geoffrey b. sprin
Posted Date:
Students also viewed these finance questions
-
Managing Scope Changes Case Study Scope changes on a project can occur regardless of how well the project is planned or executed. Scope changes can be the result of something that was omitted during...
-
The following additional information is available for the Dr. Ivan and Irene Incisor family from Chapters 1-5. Ivan's grandfather died and left a portfolio of municipal bonds. In 2012, they pay Ivan...
-
1. Calculate the budgeted nights booked: Maximum capacity (30 rooms) * Number of days per year (365) * Expected occupancy rate (80%) = 8760 nights. 2. Calculate the tariff revenues: Budgeted nights...
-
What are some of the major challenges companies face when confronted with a merger and acquisition?
-
a. Discuss the difference in the role of the journal and the ledger in capturing accounting information efficiently and effectively. b. Outline the entity concept and how it impacts on the recording...
-
Describe corporate ethics, the SarbanesOxley Act of 2002, and corporate compliance.
-
Members of the board of directors of Security Force have received the following operating income data for the year just ended: Members of the board are surprised that the industrial systems product...
-
what ways can educational curricula be tailored to nurture empathetic competencies among students, thereby fostering a more compassionate society ?
-
A student wants to investigate uniform circular motion for an object in an amusement park ride. The student will ride inside of a hollow cylindrical tube that pins the student to the inside wall of...
-
Pereira Brick Pizza Ovens sells custom built stone and brick outdoor pizza ovens on both a credit and direct debit basis. They stock a full range of spare parts and accessories for preparing and...
-
Create no more than three PowerPoint slides, summarizing your states definitions of and rules for using the following terms. Hint: Your state might not use these terms at all, or it might use a term...
-
You are the person responsible for the accounts payable ledger of Cameron Ltd. You are concerned that the statement of account for the month ending 30 June 2025 received from Deveson Ltd does not...
-
Zoe Borrillo, the accountant for Comfy Home Furnishings, was having difficulty completing the trial balance of the businesss general ledger. The balance of the Accounts Receivable Control account in...
-
Use guidestar.org or other sites to obtain the following information on the Denver Zoo. Locate the entitys website. Under what paragraph of 501(c) do you believe the organization is exempt from...
-
This part of the quiz asks you to create two essay questions and associated answers derived from the assigned chapter of the WAR textbook. Please note... credit for this quiz requires focus on the...
-
Identify Thank You mission, strategy and core competencies. Identify strategy changes that have taken place at Thank You since its founding in 2008. Your answer must in text references and must be...
-
The following cash budget for the fourth quarter of the current year has some missing information. The company has a policy of starting each month with a minimum cash balance of $9,500. Any necessary...
-
Do you believe that budgets lead organizations to place too much emphasis on financial performance and not enough emphasis on the qualitative and nonfinancial aspects of performance? Why or why not?
-
Suppose a firm has underapplied overhead at yearend. Also assume the firm writes off this underapplied overhead to COGS. Would the adjustment increase or decrease COGS? What is the effect on net...
-
Plaintiffs purchased stock warrants (rights to purchase) for blocks of Osborne Computer Corp., the manufacturer of the first mass-market portable personal computer. Because of inability to produce a...
-
Lynn Goldsmith is a photographer known for her photographs of famous musicians. In 1981, Goldsmith had a photography session with the singer Prince. Three years later, Vanity Fair obtained a license...
-
Stone Brewing Co. is a San Diego brewer that has sold its beers for over two decades. Stone has maintained its trademark and brand from the beginning, registering the STONE mark in 1998. Stone has...
Study smarter with the SolutionInn App