Office Automation Co / Foreign investment
Not what you're looking for?
21A-1. 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 after-tax 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
Purchase this Solution
Solution Summary
The solution explains capital budgeting in a foreign country
Purchase this Solution
Free BrainMass Quizzes
SWOT
This quiz will test your understanding of the SWOT analysis, including terms, concepts, uses, advantages, and process.
Understanding the Accounting Equation
These 10 questions help a new student of accounting to understand the basic premise of accounting and how it is applied to the business world.
Change and Resistance within Organizations
This quiz intended to help students understand change and resistance in organizations
Paradigms and Frameworks of Management Research
This quiz evaluates your understanding of the paradigm-based and epistimological frameworks of research. It is intended for advanced students.
Marketing Management Philosophies Quiz
A test on how well a student understands the basic assumptions of marketers on buyers that will form a basis of their marketing strategies.