INTERNATIONAL FINANCE FIN $370$

EXCEL ASSIGNMENT

EXPORT VERSUS INVEST DECISION

Palo Alto Electronics $($PAE$)$ of the US exports $360,000$ sets of routers per year to the

Philippines. It sells them for the equivalent of $$58$ per set. Current total costs are $$47$ per

set and are expected to stay the same for the next ten years. PAE is studying an offer to

start a subsidiary in the Philippines $($to be named PAE Philippines$)$ that would establish a

project to produce and sell the routers locally. Initial investment would be $$19,600,000$ in

plant and equipment plus $$400,000$ in shipping and installation and $$5,000,000$ in initial

net working capital. Plant and equipment will be depreciated to a book value of

$$5,240,000$ on a straight$-$line basis over the ten$-$year project life, but will have $8,800,000$

market salvage value. PAE Philippines would import all the parts it needs from the parent

company at a cost of $$25$ per set. Additional local variable costs are $$13$ per set. Local

fixed costs are $$2,500,000.$ The parent's pre$-$tax profit margin on the $$25$ per unit sale to

its subsidiary is $$10\mathrm{.}40.$ Tax rate in the US and the Philippines is $25\%.$ Discount rate for

Palo Alto is $12\%$ and it applies to both the parent company and its prospective subsidiary.

Assume there is no increase in the number of units sold over the ten year period.

a$.$ Use an income statement format and an excel spreadsheet to calculate all relevant

cash flows from the subsidiary's perspective.

b$.$ Is the project profitable in its own right $($i$.$e$.$ from the subsidiary's perspective$)?$ Show

all calculations that enter into this decision masking process.

c$.$ Assuming no limits on repatriation, what are the effective annual cash flows to PAE

$($the parent company$)?$

d$.$ Should PAE build the plant in the Philippines instead of exporting? Show all calculations.

This assignment is weighed at $5\%$ of total grade. Please give it its due. It contains a

couple of items that are not the same as in my example. The objective is not to

confuse but to test learning. Don't copy step by step from my example and use logic

and common sense plus the material learnt to figure out how you will complete it$.$ PLEASE COMPLETE IN EXCEL IF YOU CAN