Concept explainers
International Investment Projects In March 2014, BMW announced plans to spend $1 billion to expand production at its South Carolina plant. The plant produced the second-generation BMW X3 as well as the company’s X5 and X6 models. The new investment would allow BMW to build the new, larger X7. BMW apparently felt it would be better able to compete and create value with a U.S.-based facility. In fact BMW actually expected to export 70 percent of the X3s produced in South Carolina. Also in 2014, Swiss power storage company Alevo Group announced plans to build a $1billion plant in North Carolina, and gun manufacturer Beretta announced plans to open a plant in Tennessee. What are some of the reasons that foreign manufacturers of products as diverse as automobiles, batteries, and guns might arrive at the same conclusion to build plants in the United States?
Want to see the full answer?
Check out a sample textbook solutionChapter 5 Solutions
Corporate Finance (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
- Global Reach, Inc., is considering opening a new warehouse to serve the Southwest region. Darnell Moore, controller for Global Reach, has been reading about the advantages of foreign trade zones. He wonders if locating in one would be of benefit to his company, which imports about 90 percent of its merchandise (e.g., chess sets from the Philippines, jewelry from Thailand, pottery from Mexico, etc.). Darnell estimates that the new warehouse will store imported merchandise costing about 16.78 million per year. Inventory shrinkage at the warehouse (due to breakage and mishandling) is about 8 percent of the total. The average tariff rate on these imports is 5.5 percent. Required: 1. If Global Reach locates the warehouse in a foreign trade zone, how much will be saved in tariffs? Why? (Round your answer to the nearest dollar.) 2. Suppose that, on average, the merchandise stays in a Global Reach warehouse for nine months before shipment to retailers. Carrying cost for Global Reach is 6 percent per year. If Global Reach locates the warehouse in a foreign trade zone, how much will be saved in carrying costs? What will the total tariff-related savings be? (Round your answers to the nearest dollar.) 3. Suppose that the shifting economic situation leads to a new tariff rate of 13 percent, and a new carrying cost of 6.5 percent per year. To combat these increases, Global Reach has instituted a total quality program emphasizing reducing shrinkage. The new shrinkage rate is 7 percent. Given this new information, if Global Reach locates the warehouse in a foreign trade zone, how much will be saved in carrying costs? What will the total tariff-related savings be? (Round your answers to the nearest dollar.)arrow_forwardLFG Group, owner of the LFG, Mini and Rolls-Royce brands, has been based in Munich since its founding in 1916. But by 2022, only 17 per cent of the cars it sold were bought in Germany. In recent years, China has become LFG’s fastest-growing market, accounting for 14 per cent of LFG’s global sales volume in 2022. India, Russia and eastern Europe have also become key markets. The challenge: Despite rising sales revenues, LFG was conscious that its profits were often severely eroded by changes in exchange rates and interest rates. The company’s own calculations in its annual reports suggest that the negative effect of exchange rates and interest rates totalled €2.4bn between 2021 and 2022. LFG did not want to pass on its exchange rate/Interest costs to consumers through price increases. Its rival Porsche had done this at the end of the 1980s in the US and sales had plunged. what is the impact of foreign exchange on LFG profitability?arrow_forwardDue to rising labor costs in Malaysia, Domain Computer, based in Singapore, is considering shorting part of its production facilities from Malaysia to an emerging market, Vietnam, to better integrate its supply chain in the South east Asia region. John Lawson, the CFO of the company, estimates that Domain Computer needs to invest USD735,000 to acquire an existing factory in Vietnam and another USD285,000 in renovations and installation of new machineries. The cost of training new workers is estimated to be USD310,000. Andrew believes that the new factory will lead to an estimated USD928,000 savings in labor costs and another USD417,000 savings in logistics expenses. Required: Use cost-benefit analysis to recommend whether Domain Computer should shift parts of its production facilities from Malaysia to Vietnam. Explain your answer.arrow_forward
- A bank is considering two alternatives for handling its service calls in the next decade ( treat this as one period). The projected number of service calls is 10,000,000. If the bank sets up its own service call center in the U.S., the fixed cost is estimated to be $2,700,000, and the variable cost is calculated to be 32 cents per call. If the call service is outsourced to a foreign company, the fixed cost would be $240,000, and the unit charge would be 57 cents per call. (a)What is the break-even number of service calls? (b)Would the bank set up its own service call center or outsource call handlings? (Enter 1 for Produce or enter O for Outsource) (C)What would be the dollar amount that the bank can save by choosing the better option? (Cost difference between the two options)arrow_forwardSuppose that Kittle Co. is a U.S. based MNC that is considering setting up a subsidiary in Singapore. Kittle would like this subsidiary to produce and sell guitars locally in Singapore, and needs assistance with capital budgeting. The duration of this project is four years, with an initial investment of S$20,000,000 (Singapore dollars). Kittle Co. managers have provided you with the forecasted demand (number of guitars sold), along with the forecasted price at which each guitar can be sold, over the next four years. e following table with the total revenue from the subsidiary for years 1 through 4, in Singapore dollars (S$) e Year S$ Year 1 60,000 units S$350 S$ Year 2 60,000 units S$350 S$ Year 3 100,000 units S$360 S$ Year 4 100,000 units S$380arrow_forwardEvaluating projects with unequal lives Tasty Tuna Corporation is a U.S. firm that wants to expand its business internationally. It is considering potential projects in both Germany and Thailand, and the German project is expected to take six years, whereas the Thai project is expected to take only three years. However, the firm plans to repeat the Thai project after three years. These projects are mutually exclusive, so Tasty Tuna Corporation’s CFO plans to use the replacement chain approach to analyze both projects. The expected cash flows for both projects follow: Project: German Year 0: –$800,000 Year 1: $380,000 Year 2: $400,000 Year 3: $420,000 Year 4: $375,000 Year 5: $110,000 Year 6: $85,000 Project: Thai Year 0: –$475,000 Year 1: $225,000 Year 2: $235,000 Year 3: $255,000 If Tasty Tuna Corporation’s cost of capital is 10%, what is the NPV of the German project? a.)$535,797 b.)$563,997 c.)$507,597 d.)$451,198…arrow_forward
- Savory Seafood Inc. is a U.S. firm that wants to expand its business internationally. It is considering potential projects in both Germany and Mexico, and the German project is expected to take six years, whereas the Mexican project is expected to take only three years. However, the firm plans to repeat the Mexican project after three years. These projects are mutually exclusive, so Savory Seafood Inc.’s CFO plans to use the replacement chain approach to analyze both projects. The expected cash flows for both projects follow: Project: German Year 0: –$1,120,000 Year 1: $370,000 Year 2: $390,000 Year 3: $420,000 Year 4: $330,000 Year 5: $220,000 Year 6: $95,000 Project: Mexican Year 0: –$520,000 Year 1: $275,000 Year 2: $280,000 Year 3: $295,000 If Savory Seafood Inc.’s cost of capital is 11%, what is the NPV of the German project? Assuming that the Mexican project’s cost and annual cash inflows do not change when the project is…arrow_forwardVarious industries suffer from an acute shortage of semiconductors (an essential component in electronic gadgets). Since the start of 2022, Taiwan Semiconductor Manufacturing Co. (TSMC), the world's largest contract chipmaker, increased chip prices by as much as 20%. United Microelectronics (UMC) has also issued a price increase of its own, raising quotes for 28nm and 22nm processes. A third semiconductor manufacturer based in China-Semiconductor Manufacturing International (SMIC) has joined TSMC and UMC in raising its prices for 28nm and 40nm processes. i. Consider the market for semiconductors is perfectly competitive. What will be the impact of an increase in prices for semiconductors on manufacturers' profits in the short and long-run? Explain your answer with reference to the law of supply. ii. Now consider that the semiconductors market is an oligopoly, where TSMC, UMC and SMIC control 90 per cent of the market share. Do you think the unanimous action of the three giant…arrow_forwardBMW, owner of the BMW, Mini, and Rolls-Royce brands, has been a major presence in Europe since 1916. The company still sells 46 percent of its cars in Europe, and growth is highest there. However, China is becoming one of BMW’s most important markets. In 2016, the company sold over 520,000 cars in China, and BMW has turned to the Chinese market as a primary focus for future sales. Despite rising sales revenues, BMW is conscious that its profits are often wiped out by changes in exchange rates. The company has pointed out that it was hit particularly hard by China’s currency devaluation in late 2015. BMW Brilliance Automotive Co. Ltd., BMW’s subsidiary in China, imports about half its components from Europe and elsewhere, and it faced major declines in profit because of the negative effects of unfavorable exchange rates. However, BMW did not want to pass those exchange rate costs on to consumers through price increases. Its rival, Porsche, had done that in the United States at the end…arrow_forward
- BMW, owner of the BMW, Mini, and Rolls-Royce brands, has been a major presence in Europe since 1916. The company still sells 46 percent of its cars in Europe, and growth is highest there. However, China is becoming one of BMW’s most important markets. In 2016, the company sold over 520,000 cars in China, and BMW has turned to the Chinese market as a primary focus for future sales. Despite rising sales revenues, BMW is conscious that its profits are often wiped out by changes in exchange rates. The company has pointed out that it was hit particularly hard by China’s currency devaluation in late 2015. BMW Brilliance Automotive Co. Ltd., BMW’s subsidiary in China, imports about half its components from Europe and elsewhere, and it faced major declines in profit because of the negative effects of unfavorable exchange rates. However, BMW did not want to pass those exchange rate costs on to consumers through price increases. Its rival, Porsche, had done that in the United States at the end…arrow_forward1: Mars Technologies is considering setting up a plant in a foreign country. The plant will have an estimated useful life of 4 years and the estimated costs of setting it up are $20 million. The company’s CFO has estimated the following cash flows associated with the new plant: Year 1 = $5.8 million Year 2 = $7.9 million Year 3 = $8.6 million Year 4 = $10.5 million The company is concerned about its current exports to the foreign country, which are expected to be reduced by $1,200,000 for each of the 4 years. Given that the company’s required rate of return is 12%, what is the NPV of the project? Q#2: Jupiter Inc.’s directors are considering expanding their operations in foreign markets. They estimate that the cost of expansion is approximately $42 million. The company’s CFO has estimated that new foreign operations will generate the following cash flows: Year 1 = $2,120,000 Year 2 = $2,838,000 Year 3 = $3,480,000 Year 4 = $4,570,000 Year 5 onward, the cash flow stream is going to…arrow_forwardA manufacturer in Nebraska ships finished products to the ocean port in San Diego, California. New loading facilities will be needed to accommodate the expected growth in sales for their new product. In 2018, the company shipped 3.5 million pounds of product through several areas in San Diego. The logistic Costs in 2018 are given in the table. Due to growth in emerging markets, the company expects a growth rate of 8% per year through this port for the next five years.Rail Truck Transportation Variable Cost $ 170,000 $ 310,000 Inventory CostsCarrying 40,000 25,000 handling 15,000 40,000 Ordering 5,000 15,000 Fixed Cost 160,000 90,000 Total Cost $ 390,000 $ 480,000 A. What is the variable cost of each transportation method (Rail and Truck)? B. What is the cost to ship 4 million pounds of products for each transportation method? (Note: Round the variable cost per pound to 4 decimal places) C. At what level of demand per year would these two transportation methods be equal in terms of…arrow_forward
- Cornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage Learning