China is fast becoming a manufacturing superpower. High-tech companies, such as computer chip manufacturers, and low-tech companies, such as textile manufacturers, have built manufacturing facilities in China. Assume that you are CFO of an automobile manufacturer looking to build a $400 million (U.S.) plant in China. Discuss the factors that should determine the appropriate required return on this investment opportunity.
Your discussion about China should begin with a clear logical explanation of the theory behind the concept of "required return."
1. Is it possible to make a reasonably accurate estimate of the required return?
2. Make an estimate of the required return, starting with a 12% weighted average cost of capital for the U.S. auto manufacturer, and adding reasonable estimated percentages for each of the separate risk elements you can foresee.
More info on China: http://www.heritage.org/research/features/index/country.cfm?id=China
The solution provides a discussion on the investment opportunity available in China including an estimate of the required return.