(a) Financial Appraisal

Projected Cash Flows Terranian Francs (million)

Year 0 1 2

Sales 658.45 735.16

Labour 228 262
Local Components 90 103
German Components 41 47
Distrubtion 20 23
Fixed Costs 50 57

Total Costs 429 494

Taxable CashFlows 229 242
Tax (20%) -46 -48
Tax saved from depreciation 29 22
Investment -580
Working Capital -170 -34 -31
Remittable to UK -750 178 184

Exchange Rate 36.85 43.35 48.4

Remmitable Cash In Pounds -20.4 4.1 3.8
Add UK Tax -0.2 -0.27
Net Cash Flows -20.4 3.9 3.5
Discount Factor 1 0.870 0.756
PV -20.35 3.41 2.67
NPV -5.94

Working Notes
Terranian Terranian
WN 1 Spot Rates PP Factor francs/pounds francs/Euros
Years
0 36.85 23.32
1 1.2/1.02 43.35 27.44
2 1.15/1.03 48.40 30.63
3 1.10/1.03 51.69 32.71
4 1.10/1.03 55.21 34.94

WN 2 Sales (50,000 x 480 x Exchange Rate)

Years 0 1 2
658 735

WN 3 German Component
50000 x 30 x Exchange Rate x Inflation Factor
Years 0 1 2
41 47
WN 4 Labour
Incremental Cost of employing 50 extra workers
50000 x 3800 x (50/250) = F38 million

This is less than the F75 million a year factory rental, so the extra workers emloyed
Costs
Years 0 1 2
228 262
WN 5 Local Components
Years 0 1 2
90 103
WN 6 Sales and Distributions
Years 0 1 2
20 23
WN 7 Fixed Costs
Years 0 1 2
50 57

WN 8 Tax Allowable Depreciation

Years 0 1 2
Written Down Allowance 580 435
Tax Written Down Value 145 109
Tax Saved (20%) 29 22

WN 9 Working Capital
Years 0 1 2
170 34 31

WN 10 Discount Factor
k = 4.5 + 1.5 (11.5 - 4.5) = 15%

WN 11 UK Tax
Year 1 2 3
Sales less cash costs in terrania 230 241 243
Depreciation 145 109 82
Taxable in Terrania 85 132 161
Extra 10% Tax 8.5 13.2 16.1
Pounds equivalent 0.2 0.27 0.31

UK Investment

Cost of closing UK Factory = 35 (1-0.3) - 20 = £4.5 million

Cost of downsizing = 20 (1-0.3) -10 = £4 million
Downsizing is the cheaper option, even before cash flows from the downsized factory and the fact that closure would mea
markets couldn’t be fully supplied is taken into account.

Using CAPM, discount rate = 4.5 + 1.1(11.5 - 4.5) = 12.2%, say 12%

Years 0 1 2
£m £m £m
Net Downsizing costs -4
Post Tax Cash Flows 2.9 2.9
-4 2.9 2.9
DF @12% 1 0.893 0.797
-4.000 2.589 2.312
NPV 5.007 £m
(b) Strategic Investments: Avto needs to think about whether it's a good idea to invest in Terrania. Are there good reasons
getting involved there? Maybe there are other countries where they could invest with more potential customers or lower
They should also think about things like laws, regulations, and how people do business there.

Financial Structure: Getting the money they need might be a big challenge.

Limitations of Analysis:

If costs go up more than expected, Avto might not make as much money as they thought.
Avto might want to keep investing in Terrania after four years. If they do, they should think about how much money they'l
after that, and how much they'll have to pay to keep using the factory.
The analysis doesn't think about what will happen after production stops in Terrania in four years, or if moving production
doesn't work well.
Sometimes the value of money in one country isn't the same as in another. So, they need to look at different possibilities a
check how they could change things like costs and profits.

Bad Publicity: If Avto moves to a place where workers are paid less, people might not like that and might not want to buy
products anymore.

Political Risk: Avto might face problems because of decisions made by the government in Terrania. Since things are uncert
they might want to wait and see what happens before making a decision.

( C) Impact on blocked remittances

Fm
Year Cashflows Investment factor Cash flow at yr 4
1 179 1.3915 249
2 184 1.21 223
3 188 1.1 207
4 620 620
Amount in Terrania 1299

Exchange Rate 55.2

Amount in Terrania £m 23.5
Dis Factor @15% 0.513
DCF 12.1

This compares with discounted cash flows totallying £14.2 m if remittances are not blocked

Dealing with Blocked Remittances:

Invest in Terranian Money Market: Avto could put their money in Terranian investments, but they might end up short by £
million, and there's no guarantee they'll get that money back anytime soon.
Use Other Methods Instead of Dividends: Avto could get money by charging for things like transferring goods, using paten
providing services, or they could loan money and charge high interest rates. But these methods might look suspicious to th
Terranian government, and they might try to stop Avto from moving the money out by saying the transactions are fake.
an Francs (million)
3 4

785.12 838.48
288 317
114 125
52 57
25 28
63 70

543 597
242 241
-48 -48
16 12
150
-23 258
187 613

51.69 55.21
3.6 11.1
-0.31 -0.33
3.3 10.8
0.658 0.572
2.18 6.16

3 4
785 838

3 4
52 57
 3 4
288 317

3 4
114 125

3 4
25 28

3 4
63 70

3 4
326 245
82 61
16 12

3 4
23 258

4
241
61
180
18
0.33

ry and the fact that closure would mean

3 4
£m £m

3 3.1
3 3.1
0.712 0.636
2.135 1.970
est in Terrania. Are there good reasons for
th more potential customers or lower costs.
ess there.

ought.
d think about how much money they'll make

a in four years, or if moving production

need to look at different possibilities and

ot like that and might not want to buy Avto's

ent in Terrania. Since things are uncertain,

ents, but they might end up short by £2.1

gs like transferring goods, using patents, or

se methods might look suspicious to the
by saying the transactions are fake.