REVISION to International Capital Budgeting Analysis - Phyllis Cooper

Running Head: International Capital Budgeting Analysis and Presentation 1

International Capital Budgeting Analysis and Presentation

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International Capital Budgeting Analysis and Presentation

Introduction

The Mexico investment of the country looks very appealing; this case about the company attributed an increase in operation costs and reduced operating profits, consideration needs to be made on whether to take the option or to consider it otherwise. First, retrieving on the internal financial condition of the company, it good to analyze that is attributed to the investment option and relate it to the overall benefit that is to be realized from taking the portion. Moreover, the conditional factors that exist between in the market and the predicted change and preferences in the international market as concerned to the company’s business. Ultimately, the business of the company in the international market and the efficiency of financial accessibility are to be considered in this analysis so as to take a better decision on the right direction that the firm should take (Eun and Resnick, 2015).

The company is in need to improve in operating profits as it relates that it has dropped extensively over the last one year. Despite the drop being out of the experienced global recession, the company need should look for an alternative that will help keep it at the top in any recession realized. Equally, the main agenda for the company is to expand its business operations worldwide, and this might be the upper hand that should be considered to provide the likely option of investment the company, needs to take (Wild, Wild & Han, 2014). The business of cartilage recycling is seen to improve, and the predictions are it will improve more in the future as the company operates.

Investment cash flow analysis

The company financial statement indicates that it has incurred a substantial decrease in net profit. This loss is attributed to the experienced global recession even affecting the company competitors. Also regarding the company consolidated financial statement, the company has a high level of net profit initially when it introduced the business of printer cartridge recycling. The required project investment cost is of the new machine is estimated to be 220, 000 Euro which is a manageable expenditure as compared to the company’s financial status.

Before getting the full cash flow analysis of the company of its newly established markets, it god to consider the cash flow impact that the project will create in the Mexico subsidiary of the projected returns that the company is associated to realize from the Mexico subsidiary. This sample analysis can assist to project that cash flows expected from each subsidiary if the investment is made in every company operating subsidiary (Aizenman, Binici & Hutchison, 2014). In the same case, benefit realized from the project should out make the initial cash outlay incurred of Euro 220, 000. The benefit can be realized decrees in the total direct cost of cartilage recycling in Mexico this is the initial agenda of the company to reduce the direct cost attributed to the new project or recycling cartilages and increase the efficiency of the production process. This will help the management to make the decisions on how to solve the Mexico situation of increased work with few employees.

The decrease is as illustrated in the table below.

From the above analysis done for Mexico, it indicates that the new machine will greatly benefit the company since the significant value of the labor and material cost realized from the use of the machine is huge and it can equally over do the initial cost of investment of the new machine for the production services.

Machine Durability comparison

The new machine has a short life span. It requires a new replacement after ten years. The old machine used has a long lifespan, and it will operate for more time flame despite the required amount of operators needed. This demand that the machines replacement cost and scrap value realized should be compared, and the cost analyzed effectively to make a choice. For the new machine, when considering the replacement value and the cost benefit realized from the machine after ten years, the machine is more preferable for use than the old machine for the company in all her subsidiaries.

Timing of the Company and the GDP impact on Investment

The timing of the company is perfect in the business of recycling cartilage is experienced to have a significant increase. Many customers are realizing the benefit of recycling and added the advantage that the company provides the services to the cheaply, the company selling level has a greater chance to increase in operation and even widen up in its new markets. As also indicated by the GDP of the Mexico, the market value of all the goods and services produced has increased from 4.4% to 5.1% which implies that the company investment in Mexico market will increase more its revenue. Although concerning the recession impact, the GDP has dropped over the last few years. The recession has a low chance to continue, and at this time, the GDP of Mexico might increase shortly hence and an indication of a better investment opportunity for the company in Mexico.

Other Investment Options to take as regards the Exchange Rate

The investment decision of the company will also depend on the exchange rates and the expected increase or decrease in the exchange rate of the MXP and EUR. The decision to be made on the investment should consider the available contractual agreements that will allow the company to be safe on the transactional costs that are realized from transacting finance from Mexico to the main branch in France. The available major option that the company needs to prefer is to take forward contracts, futures, and options.

a. Future and Forward Contracts

For instance, from the past exhibited in the Mexican market, the exchange rate of 1MXP is seen to increase over the years in a consistent value. During the year 2000, the spot rate of exchange of MXP to EUR was 9.4 which has consistently increase over time up to 16.2. This indication shows that the chances of the exchange rate to continue increasing in the future are high. This increase suggests that the EUR is strengthening more as relates to MXP. The best way the company should transact is by suing the EUR for the advantage of evading the attributed exchange cost losses. The projection might also suggest the weakening value of the Euro and the strengthening of MXP, which will again suggest that the company need to transact and carry the cash flow analysis in using MXP.

The above decisions may be made more perfect by involving future and forward contract by exchange rate agencies. That is, if the company is to invest in Mexico, it will, therefore, need to enter into a future contract and agree to transact in the future at a fixed exercise rate. That will mean, if the future sports rate of the company will increase or decrease, the agreed future sport is what the company needs to use in exchanging it profit realized on Mexico MXP or EUR to what it prefers bests. But for this case, the company prediction using the available data indicates that there is a likely hood of the EUR currency to continue strengthening. The company, therefore, should determine the value that the exchange rate is to change as relate to the current exchange rate. The current exchange rate is 6.6 which therefore suggest that the exchange rate is likely to increase above 7 in the subsequent years. The company, therefore, should agree upon the future exercise rate of 7 and above. Therefore, all the financial cash flows and should be prepared using the EUR currency

b. Short-term Bank lending rate and Borrowing

Currency swaps, in this case, implies swapping of interest rate in two recognized companies (Bénétrix, Lane & Shambaugh, 2015).. If local companies can borrow cheaply in Mexico as compared to a foreign company, the company should look for a similar company wishing to borrow in France locally and enter into a contract of swapping their interests. The Mexican company will borrow for the company to invest in Mexico. Similarly, the company will take the responsibility and borrow for the Mexican company locally. After the investment is made, both companies will agree to swap the interest rates and exchange the value of the currency to their local currency.

In this case, the swap might partially work for the company. If the Mexican subsidiary is recognized locally and can be allowed to borrow locally as per the local short-term banking rate, the company can prefer otherwise and use the Mexican subsidiary to borrow locally. But also considering the local bank lending rate in Mexico and France, it better to prefer borrowing in France than in Mexico. The lending rate of the banks in France is less as compared to Mexico. Also because the company is to use EUR in transaction, it is better for the company to borrow locally and avoid attributed exchange rate losses that may result if it prefers to borrow in Mexico

Mexico Risk of the attributed Project.

Since the Mexican subsidiary company is obliged to operate using the Mexican currency. There is a high risk of the company losing finances due to the exchange rate. The project of the new machine will result in a significant increase in the returns hence a high probable chance of the company y to realize high profits in Mexico. The profits realized would be in Mexican currency since the trading is done in Mexican local currency. The recording of this profits will require the conversation of the profits to EUR which will result in a financial loss due to exchange rate losses. The MXP is projected to reduce in value, which therefore suggests that the profits of the company will also be affected.

The increase in the inflation rate in Mexico is a greater indication of the weakening value of the Mexican Currency, that is, MXP will be cheap as compared to EUR. The solution, in this case, requires the company to have more strategized ways of how to maximize the return in Mexico and offset the losses that are attributed to the use of the local currency. One of the solutions can be spreading of the investment to other subsidiaries to help the company offset the losses realized in Mexico investments. The objective of the company is also reducing the cost of recycling the cartilages as low as possible to encourage more customers. Tom achieve so, the company is likely to prefer alternative ways f pricing, product positioning and designing to outdo the competitors in Mexico and expand more the customer base

The underlying project of the company to start recycling printer cartilages from other companies may be a booster but of a short time duration. It might dilute the image and the preferences of the customer on the company product. For instance, the customers prefer more to the company products since they are durable and long serving as compared to other companies. The brand image of the company over its products is best maintained if the company focuses on improving more on its products and offering services that only relates to the production of its own services, in that case since the new machine can result to more spacious room, the company is advised to introduce more machines and expand more its product sale within Mexico ta have a larger market share (Baker, Bloom & Davis, 2015).

Bond Trading Investment Option

The company should take an alternative to hedge against the risk that is related from the bond business. This type of investment currently should raise a concern considering the Long-term peso corporate bonds and the Euro-dominated corporate bonds. The two have a different, yielding percentage. The Peso- dominated corporate bond yielding rate is 9.21% high as compared to the long-term Euro-dominated corporate bond which has a yielding value of 4.75%. The predicted change in the market suggests that the long-term peso-dominated corporate bond is likely to reduce in value as related to EUR. For that case, to hedge against the risk, the company currently should take the Euro bond to exchange in the future. In this case, the Euro will increase in value thus meaning that the company will gain. If the contrary applies, the company will lose since it will need to exchange for the Peso dominated corporate bond for a less value as relates to the current selling and buying value.

Moreover, the borrowing rate for in France and Mexico will determine the place of borrowing that the company should use. In Mexico, the borrowing rate of the bond is very expensive as compared with the borrowing rate in France. From the company records, French banks’ prime rate for Euro loans is 4.99$ and while the rate in Mexico on short-term peso loans is about 8.10%.This rate indicates that it will be more expensive for the company to borrow in Mexico as relates to borrowing in France. Therefore, all the borrowing decisions on the investment of the project should be made in France to avoid the extra cost of borrowing in France.

Also considering an investment in Ten-year government Bond in Mexico and France, the Mexico government bond is unstable, and it does not provide a predictable pattern a company can use to predict the future value of the bond. The ten year France Government Bond shows an increasing trend a bit consistent but not very much predictable. The rates of the two bonds are different. In Mexico, the ten-year bond rate is seen to have a high rate as compared to France. This factor also gives France the upper of being the best place of doing the borrowing for the investment options.

The Optimal Solution to Invest

Foremost, the analytical consideration of the project, that is, use of the new machine from German evidently provides every support of the project to be a viable endeavor for the company. The value of cost-benefit realized is enough to let the conclusion of making a decision to invest in the project. Few of the advantages realized include the reduction of the labor cost, reduction in work burden as experienced in the Mexican subsidiary and reduced damage of the cartilages due to effectiveness attained by the machine at work. Secondly, the investment option of the company is timely at the time where there is high expectation increase in GDP and the related projected increase preferences of the customer to recycle their cartilages.

Numerically, there are other considerations that relate to exchange rates. For the Mexico case, the interest rate is projected to increase. Major transactions should be done by use of EUR currency to avoid currency exchange losses. The table below indicates the year-end spot exchange rate which provides the basis of the assumption of strengthening of the value of EUR as related to MXP

The optimal selection there requires the company to use EUR as the currency in the preparation of its cash flow statements. About the exchange rates, the company can also prefer on taking future or forward contracts to reduce the risk attributed to the changes that may result due to exchange rates.

The risk the project in Mexico can be regulated if the company can develop policies that relate to the Mexican market and the translation cost that should be incurred. Since the new project is to be used as a better alternative to reduce the labor costs and solve out the complaint from raised over Mexican company subsidiary of lacking enough personnel. It will be the better alternative for the company to hasten and implement the project as instant as possible. Moreover, the market prediction of Mexico is promising despite the experienced global recession; the company can hasten up its ways of production in the subsequent year and take advantage of its brand products to outdo similarly developed competitors in the market and well expand more its market share in Mexico.

The idea for the company is to develop a discounted cash flow model that will assist make a decision of carrying the project of the new machine to other 28 company subsidiaries and also introduce the recycling business to every branch in the country with lower cost. This will considerably be implementable in consideration of even the subsidiaries that operate outside the Europe region. The most challenging impact will be upon the company deciding on the borrowing and the exchange rates and develop ways to reduce the risk attributed due to the change of the two factors

Conclusion

The company system of subsidiary operations gives it a better chance of easily securing new markets. Moreover, the new idea identified that relates to the introduction of a new machines gives the company a better chance to operate internationally with low damage cots and direct cost. The market is also promising and they haven’t yet realized the new trend of recycling printer cartilages. The brand name of the company, that is, long serving and durable products is one of the booster that promotes the company business internationally. To take the advantage of that new international markets, the company should consider other related decisions that will impact on its international investment project (Bodie, Kane & Macus, 2013). The decisions should include the exchange rate fluctuations, gross domestic product of the host countries and the interest rate fluctuation of bonds and bank loan lending rate. This will help the company make financial decisions on the currency to trade on, how to determine the cash flows of the projects by developing a better prediction models

References

Baker, S. R., Bloom, N., & Davis, S. J. (2015). Measuring economic policy uncertainty (No. w21633). National Bureau of Economic Research.

Bénétrix, A. S., Lane, P. R., & Shambaugh, J. C. (2015). International currency exposures, valuation effects and the global financial crisis. Journal of International Economics, 96, S98-S109.
Aizenman, J., Binici, M., & Hutchison, M. M. (2014). The transmission of Federal Reserve tapering news to emerging financial markets (No. w19980). National Bureau of Economic Research.

Bodie, Z., Kane, A., & Macus, K. (2013). Investments (10th ed.). New York, NY: McGraw-Hill.

Eun, C.  and Resnick, B. (2015).  International financial management. (7TH ed.). McGraw-Hill/ Irwin.  ISBN 978-0-07-786160-5

Wild, J., Wild, K. L., & Han, J. C. (2014). International business. Pearson Education Limited.