Dick Smith Foods. is a U.S. company that is considering expanding its operations into Japan. The company supplies processed foods to storefront delicatessens in large cities. This requires Dick Smith Foods to have a centralized production and warehousing facility in each of these cities. Dick Smith Foods has located a possible site for a Japanese subsidiary in Tokyo. The cost to purchase and equip the facility is ¥885,000,000. Perform an NPV analysis to determine whether this is a good investment, under the following assumptions: a. The average per-unit sales price will initially be ¥510. b. First-year sales will be 17 million units, and physical sales will then grow at 10% per annum for the next 3 years. c. First-year variable costs of production will be ¥325 per unit of labor and $1.85 per unit of imported semi-finished goods. Administrative costs will be ¥200 million. d. Retail prices, labor costs, and administrative expenses are expected to rise at the Japanese yen rate of inflation, which is forecast to be 1%. Dollar prices of semi-finished goods are expected to rise at the U.S. dollar rate of inflation, which is expected to be 4%. e. The yen>dollar exchange rate is currently ¥85>$, and the yen is expected to appreciate at 3%. f. The Japanese corporate income tax rate is 34%, and there is a 10% withholding tax on payments to parent company. g. The yen-denominated equity discount rate for the project is 13%. h. All of the Japanese subsidiary’s free cash flow will be paid to the parent company.
Dick Smith Foods. is a U.S. company that is considering expanding its operations into Japan. The company supplies processed foods to storefront delicatessens in large cities. This requires Dick Smith Foods to have a centralized production and warehousing facility in each of these cities. Dick Smith Foods has located a possible site for a Japanese subsidiary in Tokyo. The cost to purchase and equip the facility is ¥885,000,000. Perform an NPV analysis to determine whether this is a good investment, under the following assumptions: a. The average per-unit sales price will initially be ¥510. b. First-year sales will be 17 million units, and physical sales will then grow at 10% per annum for the next 3 years. c. First-year variable costs of production will be ¥325 per unit of labor and $1.85 per unit of imported semi-finished goods. Administrative costs will be ¥200 million. d. Retail prices, labor costs, and administrative expenses are expected to rise at the Japanese yen rate of inflation, which is forecast to be 1%. Dollar prices of semi-finished goods are expected to rise at the U.S. dollar rate of inflation, which is expected to be 4%. e. The yen>dollar exchange rate is currently ¥85>$, and the yen is expected to appreciate at 3%. f. The Japanese corporate income tax rate is 34%, and there is a 10% withholding tax on payments to parent company. g. The yen-denominated equity discount rate for the project is 13%. h. All of the Japanese subsidiary’s free cash flow will be paid to the parent company.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Dick Smith Foods. is a U.S. company that is considering expanding its operations into Japan. The company supplies processed foods to storefront delicatessens in large cities. This requires Dick Smith Foods to have a centralized production and warehousing facility in each of these cities. Dick Smith Foods has located a possible site for a Japanese subsidiary in Tokyo. The cost to purchase and equip the facility is ¥885,000,000. Perform an NPV analysis to determine whether this is a good investment, under the following assumptions:
a. The average per-unit sales price will initially be ¥510.
b. First-year sales will be 17 million units, and physical sales will then grow at 10% per annum for the next 3 years.
c. First-year variable costs of production will be ¥325 per unit of labor and $1.85 per unit of imported semi-finished goods. Administrative costs will be ¥200 million.
d. Retail prices, labor costs, and administrative expenses are expected to rise at the Japanese yen rate of inflation, which is forecast to be 1%. Dollar prices of semi-finished goods are expected to rise at the U.S. dollar rate of inflation, which is expected to be 4%.
e. The yen>dollar exchange rate is currently ¥85>$, and the yen is expected to appreciate at 3%.
f. The Japanese corporate income tax rate is 34%, and there is a 10% withholding tax on payments to parent company.
g. The yen-denominated equity discount rate for the project is 13%.
h. All of the Japanese subsidiary’s free cash flow will be paid to the parent company.
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