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Assessing a direct investment in Chile by a US corporation

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Case Study: Assessing a direct investment in Chile by a US computer corporation

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This solution contains the solution to the case study involving assessing a direct investment in Chile by an American computer corporation from Chapter 18 - International Managerial Finance. It provides all the steps to the equations and a complete analysis of the exchange rate risks.

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a. WACC = Proportion of debt X after tax cost of debt + Proportion of equity X cost of equity
For financing is dollars, we are given
The weight of debt is 60% and the cost is 6%
The weight of equity is 40% and the return on equity is given as 12%
WACC = 0.6X6% + 0.4X12% = 8.4%

b. The sales are estimated to be $20 million and the operating cash flow is 20% of sales. Each year the operating cash flow would be 20X20%= $4 million. The time period is 5 years. The cash flows are in the nature of an annuity and so we can use the PVIFA table to get the PV factor. The discounting rate is 8% (8.4% to the nearest 1%)
PV of ...

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