# The Office Automation Corporation is considering a foreign investment. The initial cash outlay will be $10 million. ## Question: The Office Automation Corporation is considering a foreign investment. The initial cash outlay will be$10 million. The current foreign exchange rate is 2 ugans = $1. Thus the investment in foreign currency will be 20 million ugans. The assets have a useful life of five years and no expected salvage value. The firm uses a straight-line method of depreciation. Sales are expected to be 20 million ugans and operating cash expenses 10 million ugans every year for five years. The foreign income tax rate is 25 percent. The foreign subsidiary will repatriate all aftertax profits to Office Automation in the form of dividends. Furthermore, the depreciation cash flows (equal to each year’s depreciation) will be repatriated during the same year they accrue to the foreign subsidiary. The applicable cost of capital that reflects the riskiness of the cash flows is 16 percent. The U.S. tax rate is 40 percent of foreign earnings before taxes. a. Should the Office Automation Corporation undertake the investment if the foreign exchange rate is expected to remain constant during the five-year period? b. Should Office Automation undertake the investment if the foreign exchange rate is expected to be as follows? Year 0............$1 = 2.0 ugans

Year 1............ $1 = 2.2 ugans Year 2............$1 = 2.4 ugans

Year 3............$1 = 2.7 ugans Year 4............$1 = 2.9 ugans

Year 5............\$1 = 3.2 ugans

Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...
Corporation
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may...
Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...
Exchange Rate
The value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars...
Fantastic news! We've Found the answer you've been seeking!