Chapter 13

1.

Chapter13, Question 2 Impact of a Weak Currency on Feasibility of DFI Packer, Inc., a U.S. producer of computer disks, plans to establish a subsidiary in Mexico in order to penetrate the Mexican Market. Parkers executives believe that the Mexican pesos value is relatively strong and will weaken against the dollar over time. If their expectations about the pesos value are correct, how will this affect the feasibility of the project. Explain.(1 point)

2. Chapter 13, Question 3. DFI to Achieve Economies of Scale Bear Co. and Viking, Inc., are automobile manufacturers that desire to benefit from economies of scale. Bear Co. has decided to establish distributorship subsidiaries in various countries, while Viking, Inc., has decided to establish manufacturing subsidiaries in various countries. Which firm is more likely to benefit from economies of scale? (1 point)

Chapter 14

1. Chapter 14, Question 13 Capital Budgeting Example Brower, Inc., just constructed a manufacturing plant in Ghana. The construction cost 9 billion Ghanaian cedi. Brower intends to leave the plant open for 3 years. During the 3 years of operation, cedi cash flows are expected to be 3 billion cedi, 3 billion cedi, and 2 billion cedi, respectively. Operating cash flows will begin 1 year from today and are remitted back to the parent at the end of each year. At the end of third year, Brower expects to sell the plant for 5 billion cedi. Brower has a required rate of return of 17 percent. It currently takes 8,700cedi to buy 1 U.S. dollar, and the cedi is expected to depreciate by 5% per year.

a. Determine the NPV for this project. Should Brower build the plant? (2 points)

b. How would your answer change if the value of the cedi was expected to remain unchanged from its current value of 8,700 cedi per U.S. dollar over the course of the 3 years? Should Brower construct the plant then? (2 points) (Hint: note that the current value of cedi is quoted as numbers of cedi per dollar, which is an indirect quotation. Keep that in mind when you calculate the value of cedi for the next 3 years in part a, and when you convert cedi cash flow to dollar cash flow. A depreciation of a currency means a decrease in its direct quotation but an increase in its indirect quotation.)

2. Chapter 14, Question 24. Break-Even Salvage Value A project in Malaysia costs $4 million. Over the next 3 years, the project will generate total operating cash flows of $3.5 million, measured in todays dollar using a required rate of return of 14 percent. What is the break-even salvage value of this project?(2 points)