Direct Foreign Investment (DFI)

Direct Foreign Investment (DFI)

to the following:

From the case study, examine three (3) possible benefits realized by a DFI in Thailand. Compare the tradeoffs of investing now versus a year from now. Provide a rationale for your response.

From the case study, assuming high unemployment in Thailand and taking Blades unique production process into account, predict the reaction that Thai government might have to Blades making a DFI in Thailand. Determine the appropriate discount rate that Thai government should use when assessing the viability of this project. Provide a rationale for your response.

Week 7 Homework Click the link above to submit your assignment.

Homework Problems for Chapters 13 and 14 Due Week 7 and worth 40 points.

1. Chapter 13. Questions and Applications: 10 (page 430). 10. Risk Resulting from International Business This chapter concentrates on possible benefits to a firm that increases its international business. a. What are some risks of international business that may not exist for local business? b. What does this chapter reveal about the relation- ship between an MNC’s degree of international busi- ness and its risk?

2. Chapter 13. Questions and Applications: 16 (page 430). 16. DFI Location Decision Decko Co. is a U.S. firm with a Chinese subsidiary that produces cell phones in China and sells them in Japan. This subsidiary pays its wages and its rent in Chinese yuan, which is stable rel- ative to the dollar. The cell phones sold to Japan are denominated in Japanese yen. Assume that Decko Co. expects that the Chinese yuan will continue to stay stable against the dollar. The subsidiary’s main goal is to gen- erate profits for itself and reinvest the profits. It does not plan to remit any funds to Decko, the U.S. parent. Assume that the Japanese yen strengthens against the U.S. dollar over time. How would this be expected to affect the profits earned by the Chinese subsidiary? b. If Decko Co. had established its subsidiary in Tokyo, Japan, instead of in China, would the subsidi- ary’s profits be more exposed or less exposed to exchange rate risk? c. Why do you think that Decko Co. established the subsidiary in China instead of Japan? Assume no major country risk barriers. d. If the Chinese subsidiary needs to borrow money to finance its expansion and wants to reduce its exchange rate risk, should it borrow U.S. dollars, Chinese yuan, or Japanese yen?

3. Chapter 14. Questions and Applications: 13 (page 455). 13. Capital Budgeting Example Brower, Inc., just constructed a manufacturing plant in Ghana. The construction cost 9 billion Ghanaian cedi. Brower intends to leave the plant open for 3 years. During the 3 years of operation, cedi cash flows are expected to be 3 billion cedi, 3 billion cedi, and 2 billion cedi, respec- tively. Operating cash flows will begin 1 year from today and are remitted back to the parent at the end of each year. At the end of the third year, Brower expects to sell the plant for 5 billion cedi. Brower has a required rate of return of 17 percent. It currently takes 8,700 cedi to buy 1 U.S. dollar, and the cedi is expected to depreciate by 5 percent per year. a. Determine the NPV for this project. Should Brower build the plant? b. How would your answer change if the value of the cedi was expected to remain unchanged from its cur- rent value of 8,700 cedi per U.S. dollar over the course of the 3 years? Should Brower construct the plant then?

Direct Foreign Investment (DFI)

4. Chapter 14. Questions and Applications: 25 (page 457). 25. Capital Budgeting Analysis Zistine Co. consid- ers a 1-year project in New Zealand so that it can capitalize on its technology. It is risk averse but is attracted to the project because of a government guar- antee. The project will generate a guaranteed NZ$8 million in revenue, paid by the New Zealand govern- ment at the end of the year. The payment by the New Zealand government is also guaranteed by a credible U.S. bank. The cash flows earned on the project will be converted to U.S. dollars and remitted to the parent in 1 year. The prevailing nominal 1-year interest rate in New Zealand is 5 percent, while the nominal 1-year interest rate in the United States is 9 percent. Zistine’s chief executive officer believes that the movement in the New Zealand dollar is highly uncertain over the next year, but his best guess is that the change in its value will be in accordance with the international Fisher effect (IFE). He also believes that interest rate parity holds. He provides this information to three recent finance graduates that he just hired as managers and asks them for their input. a. The first manager states that due to the parity conditions, the feasibility of the project will be the same whether the cash flows are hedged with a forward contract or are not hedged. Is this manager correct? Explain. b. The second manager states that the project should not be hedged. Based on the interest rates, the IFE suggests that Zistine Co. will benefit from the future exchange rate movements, so the project will generate a higher NPV if Zistine does not hedge. Is this manager correct? Explain. c. The third manager states that the project should be hedged because the forward rate contains a premium and, therefore, the forward rate will generate more U.S. dollar cash flows than the expected amount of dollar cash flows if the firm remains unhedged. Is this man- ager correct? Explain.

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