Analyze the European net sales translated into U.S. dollars; forecast exchange rates

Scenario:

As a senior financial analyst for Fresh Juices, Inc., the largest fresh fruit drink company in the United States, you are a key player in corporate finance for the business. You are consulted on major capital projects, prepare analysis for executive officers, present material at senior management meetings, and play the overall role of advisor to executive and senior officers.

Fresh Juices, Inc. has witnessed its sales grow from US$1 million in the first year of operations in 1970 to US$1.5 billion last year. The company started as a regional supplier of fresh fruit drinks in California and initially expanded in the West. However, over the last 15 years, the company has moved further east, north, and south. Today, the company's lines of products can be found on the shelves of any major grocery store in the U.S., and its market share of fresh fruit drinks is 80% in the United States.

The Drive to Expand Internationally

On a recent trip to Canada and Latin America, Hector Vasquez, the company's chief executive officer (CEO), noted the lack of fresh fruit drinks in the supermarkets. When he returned, he brought in all of his senior officers and said, "I want to be international in a year. We have a great product, and I think we can compete effectively in North and South America, Europe, and Asia. My recent travels confirmed my suspicion that fresh fruit drinks like ours do not exist outside the U.S.," he said. "Furthermore, with the U.S. market growing at 2% annually, we need to find other markets that have the potential to grow at a faster pace."

Mr. Vasquez asked your boss, Bonita Galloway, to head up the team to do the analysis on international opportunities and report back to him in the coming weeks. With that, he dismissed the meeting, and the senior officers left.

The Meeting

The U.S. business was so mature and was not growing rapidly, so Ms. Galloway thought international expansion might be just what the company needed. She was concerned that the company's profit margins would start to be squeezed in the company years if the firm did not find other sources of revenue growth. This would force the company to make drastic cost cuts and could potentially impact Fresh Juices' ability to compete.

Given your role in the organization, Ms. Galloway immediately thought of you as the finance lead on this project. She called you to her office to discuss what happened at the meeting with Mr. Vasquez.

After briefing you, she said, "I want you to be the primary contact on this. I will need you to work closely with the various departments that will be involved with this effort. Specifically, I need to lean on your analytical capabilities because we need to make objective decisions. I need you to give me the facts?not what you think I want to hear. This is important to the future of the company. I know I can count on you."
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Given where things are going with the project, you decide to start giving some thought to how the company can make money or lose money by simply engaging in international transactions. You start by looking at the net sales figures from the European region that the sales vice president provided in the following:

Year 1 sales = 125 million euros
Year 2 sales = 150 million euros
Year 3 sales = 175 million euros
Year 4 sales = 200 million euros
Year 5 sales = 250 million euros

The forecasted exchange rate for euros to U.S. dollars is between 0.40 to 1.20 (which is 0.40 euros/US$1 to 1.20 euros/US$1), and the current exchange rate is 1 euro for US$1. You decide to use these two extreme points to analyze how European revenue would translate to U.S. dollars over the 5-year time period.

Use Microsoft Excel to analyze the European net sales translated into U.S. dollars based on the two exchanges rates and how that would differ from the current exchange rate.

Explain the forecasted direction for exchange rates and what that means to the company's revenue and profits.