Timeline

units
assuming that by time all organized, we are 01/01/1992
Discount Rates Used
Afiiliate
Parent
Initial Investment Outlay
Plant acquisition, retooling, etc..
Plant acquisition, retooling, etc..
Depreciation
WC Requirements
WC
A/P
Total WC Requirements
Sales and Revenue Forecasts
Profit-maximizing price
Demand
England
yearly increase

%
%

$US

155000000
77500000

% of sales
% of sales

/ unit
units (& )
%

France
yearly increase

units (& )
%

Germany
yearly increase

units (& )
%

Exchange Rates (Nominal)

Price
Price
Exchange Rate
Exchange Rate
Pound depreciation factor

()
($US)
[$US/]
[/$US]
%

Production Cost Estimates

Variable Costs
Labor
yearly increase

/ unit
%

Material
yearly increase
Material Transferred from Parent
Material Transferred from Parent

1991

/ unit
%
$US/unit
/ unit

2
0.5000

Fixed Costs
License Fees
yearly increase
Overhead Allocations
yearly increase
Taxes
Effective Tax Rate
Effective Tax Rate
Allowed losses carried forward?
Witholding Tax

% of sales
%
% of sales
%

% in UK
% in US

0.4
0.325
YES

% in UK

0.11

Terminal Value
Terminal Value
2.5x Net cash Flow (last year)
note: recovery of WC in last year excluded
Divdends to Parent

% of CF

0.50

1992

1993

1994

1995

1996

0.1125
0.15

0.1125
0.15

0.1125
0.15

0.1125
0.15

0.1125
0.15

11071429

11071429

11071429

11071429

11071429

0.3
0.1
0.2

0.3
0.1
0.2

0.3
0.1
0.2

0.3
0.1
0.2

0.3
0.1
0.2

250

278

308

342

380

75000
0.1275

84562
0.1275

95343
0.1275

107499
0.1275

121205
0.1275

60000

72150
0.2025

86760
0.2025

80000

92520
0.1565

250
490
1.96
0.5102

278
534
1.92
0.5208

308
582
1.89
0.5291

342
633
1.85
0.5405

380
692
1.82
0.5495

40

43.04
0.076

46.31
0.076

49.83
0.076

53.62
0.076

70

73.99
0.057
60
31.25

78.21
0.057
60
31.75

82.67
0.057
60
32.43

87.38
0.057
60
32.97

60
30.61

0.03

0.0330
0.10

0.0363
0.10

0.0399
0.10

0.0439
0.10

0.05

0.0558
0.115

0.0622
0.115

0.0693
0.115

0.0773
0.115

0.4
0.325

0.4
0.325

0.4
0.325

0.4
0.325

0.4
0.325

YES

YES

YES

YES

YES

0.11

0.11

0.11

0.11

0.11

0.50

0.50

0.50

0.50

0.50

1997

1998

0.1125
0.15

0.1125
0.15

11071429

11071429

0.3
0.1
0.2

0.3
0.1
0.2

380

380

136658
0.1275

154081
0.1275

104328
0.2025

125454
0.2025

106999
0.1565

123744
0.1565

380
681
1.79282376
0.5578
0.985068

380
671
1.7660533156
0.5662
0.985068

57.69
0.076

62.08
0.076

92.36
0.057
60
33.47

97.62
0.057
60
33.97

0.0483
0.10

0.0531
0.10

0.0862
0.115

0.0961
0.115

0.4
0.325

0.4
0.325

YES

YES
0.11

0.11

0.50

0.50

Income Statement (figures in thousands)

units
Revenue
Demand
England
France
Germany
Total Demand
Price

units
units
units
units
/ unit

Total Revenue

Variable Costs
Labor
Materials
Materials from Parent

/ unit
/ unit
/ unit

Total Variable Costs

Gross Profit

Fixed Costs
License Fees
Overhead Allocation
Witholding Taxes
Total Fixed Costs
Depreciation

1991

EBIT
Taxes

Net Income

Cash Flow Statement (figures in thousands)

Net Income
Depreciation
Working Capital Requirements
Revovery of Working Capital
Costs

Cash Flow
Terminal Value

-77500
-77500

PV Factor

PV of CF

-77500

NPV

-15974

Dividends Distributable

1992

1993

1994

1995

1996

1997

75
0
0
75
0

85
0
0
85
0

95
60
0
155
0

107
72
80
260
0

121
87
93
300
0

137
104
107
348
0

18750

23508

47846

88800

114184

132234

0.0400
0.0700
0.0306

0.0430
0.0740
0.0313

0.0463
0.0782
0.0317

0.0498
0.0827
0.0324

0.0536
0.0874
0.0330

0.0577
0.0924
0.0335

10546

12539

24275

42823

52273

63861

8204

10969

23571

45976

61911

68373

563
938
165
1665
11071

776
1311
229
2316
11071

1737
2974
518
5229
11071

3546
6155
1067
10768
11071

5015
8824
1522
15362
11071

6389
11394
1956
19739
11071

-4532
0

-2418
0

7270
128

24138
9655

35478
14191

37562
15025

-4532

-2418

7142

14483

21287

22537

-4532
11071
-3750

-2418
11071
-4702

7142
11071
-9569

14483
11071
-17760

21287
11071
-22837

22537
11071
-26447

2789

3952

8645

7794

9521

7162

0.8989

0.8080

0.7263

0.6528

0.5868

0.5275

2507

3193

6278

5088

5587

3778

1395

1976

4322

3897

4761

3581

1998

154
125
124
403
0
153246

0.0621
0.0976
0.0340
78104
75142

8145
14723
2515
25383
11071
38687
15475
23212

23212
11071
-30649
30649

64933
9086

0.4741
35094

32466

After-Tax Dividend Received by the Parent (in thousand

units

1991

1992

Dividend Received
Witholding Taxes

1395
153

Grossed-Up Dividends (GBP)

1241

Grossed-Up Dividends (USD)

$US

621

US Taxes

$US

202

Total Dividend Received by Parent

419

Present Value of Project (in thousands)

License Fees
Materials Sold

563
4500

Total Receipts
Total Receipts

$US

5063
2583

Taxes

839

After-Tax Receipts

1743

After-Tax Dividend

419

Recovered Working Capital

Project Cost

-155000

Net Cash Flow

-155000

2162

0.87

PV of Cash Flow

-155000

1880

NPV

-112697

PV Factor

Project undesirable since NPV < 0

(in thousands)
1993

1994

1995

1996

1997

1998

1976
217

4322
475

3897
429

4761
524

3581
394

32466
3571

1759

3847

3468

4237

3187

28895

897

2004

1835

2290

1751

16117

292

651

596

744

569

5238

606

1352

1239

1546

1182

10879

776
5074

1737
9321

3546
15579

5015
18029

6389
20879

8145
24197

5849
3047

11057
5850

19125
10338

23044
12662

27268
15210

32341
18313

990

1901

3360

4115

4943

5952

2056

3949

6978

8547

10266

12361

606

1352

1239

1546

1182

10879
30649

2662

5301

8217

10093

11448

53889

0.76

0.66

0.57

0.50

0.43

0.38

2013

3486

4698

5018

4949

20259

able since NPV < 0

Sensitivity Analysis
It would have been insightful to have more information on the risks that could stem from undertak
as we can see in Britain right now with the upcoming election, the GBP is under a lot of duress and co
for possible referendums that might take place if the Labor party wins.
From this information we could have conducted a sensitivity analysis with weighted probabiliti

Pound Assumptions
It would seem that a constantly depreciating pound without the mention of inflation expectations a
Without assessing the macro-environment and the differences in this environment between the US an
I would feel a lot more comfortable using these exchange rate forecasts if more information was provi

Working Capital
Again, just simply stating that WC needs will be 30% of sales or a net 20% would seem to predict t
Anyone who has looked at multi-nationals know that this is not the case. It would seem that forecastin
Had thes forecasts been for the paret company who has a longer history and better understanding of

ould stem from undertaking a foreign transaction such as this one. For example,
der a lot of duress and corporations are most certainly making contingency plans

with weighted probabilities of different outcomes to get a better picture of the ``true costs``

of inflation expectations and other factors is innapropriate.

ment between the US and GB, it is hard to just simply forecast exchange rates.
ore information was provided as to how they were estimated.

% would seem to predict that everyhing is going to run smoothly and that A/P will remain constant.
ould seem that forecasting working capital needs for a newly set-up affiliate is tougher than simply using a stra
better understanding of its WC needs, they could be forgiven but for a new venture in a foreign market, maybe

n constant.
than simply using a straight-line method.
a foreign market, maybe a more conservative approach could have been applied.