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Category > Accounting Posted 15 Aug 2017 My Price 12.00

beer brewery

13.2        The following project-specific information is known about investment in a beer brewery in a Western European country that uses the euro:

■    The project will last two years. Operating cash flows are received at year-end.

■    The euro inflation rate is 10 percent per year.

■    All cash flows share the same nominal discount rate of 20 percent per year.

■    An investment of 100,000 will purchase the land for the brewery. The land is to be sold after two years. The real value of the land is expected to remain constant at 100,000.

■    Constructing the brewery costs 50,000, payable at the start of the project. The brewery will be owned by the foreign subsidiary and depreciated on a straight-line basis over two years to a zero salvage value. The brewery is expected to be sold for its market value of 25,000 after two years.

■    An investment in working capital of 50,000 is necessary. No additional investment in working capital is necessary, but the value of this investment is expected to grow at the rate of inflation.

■    Annual sales are expected to be 5,000 barrels/year.

■    Beer sells for 100 per barrel. The price of beer is expected to rise at the euro rate of inflation.

■    Variable operating costs are 20 percent of sales.

■    Fixed operating costs are 20,000 per year and are expected to rise at the rate of inflation.

■    Local tax rates on income and capital gains are 40 percent.

a.   

$/
 

Identify expected future euro cash flows and value them at the appro- priate euro discount rate.

b.    Suppose the current spot exchange rate is S0

 

= $10/  . The nominal

 

discount rate on brewery projects in the United States is also 20 percent. Assuming the international parity conditions hold, calculate the dollar value of the brewery project from the parent’s perspective as in Equation

13.4. Value the project again using the project’s perspective in Equation

13.2. Are these values the same?

Answers

Maurice Tutor
(5)
Status NEW Posted 15 Aug 2017 08:08 AM My Price 12.00

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