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Factors that should determine the appropriate required return on this investment opportunity in China.

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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

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Solution Summary

The solution provides a discussion on the investment opportunity available in China including an estimate of the required return.

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China is a manufacturing superpower. Assume that you are CFO of an automobile manufacturer looking to build a $U.S.800 million plant in China. You are discussing this project with your spouse, who is intelligent, but has no background in finance.

1. Your discussion should begin with a clear and logical step-by-step explanation of the theory behind the concept of "required return" on proposed capital investments. Explain how cost of equity, cost of debt, WACC, and allowances for various risk factors are involved in determining the "required return" on proposed international capital investments.

2. Discuss each of the main risk factors that should be allowed for in addition to WACC in order to determine the appropriate required return on this capital investment opportunity.

3. Make a reasonable 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.

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