AssumptionsTimelineunits19911992199319941995199619971998assuming that by time all organized, we are 01/01/1992

Discount Rates UsedAfiiliate%0.11250.11250.11250.11250.11250.11250.1125Parent%0.150.150.150.150.150.150.15

Initial Investment OutlayPlant acquisition, retooling, etc..$US155000000Plant acquisition, retooling, etc.. 77500000Depreciation 11071429110714291107142911071429110714291107142911071429WC RequirementsWC% of sales0.30.30.30.30.30.30.3A/P% of sales0.10.10.10.10.10.10.1Total WC Requirements0.20.20.20.20.20.20.2

Sales and Revenue ForecastsProfit-maximizing price / unit250278308342380380380Demand
George Gardiner: George Gardiner:

Note - all demand figures rounded down to nearest whole unit of demand, not using rolling inventory etc too complicated

Englandunits (& )750008456295343107499121205136658154081yearly increase%0.12750.12750.12750.12750.12750.12750.1275

Franceunits (& )600007215086760104328125454yearly increase%0.20250.20250.20250.2025

Germanyunits (& )8000092520106999123744yearly increase%0.15650.15650.1565

Exchange Rates (Nominal)Price()250278308342380380380Price($US)490534582633692681671Exchange Rate [$US/]21.961.921.891.851.821.792823761.7660533156Exchange Rate [/$US]0.50000.51020.52080.52910.54050.54950.55780.5662Pound depreciation factor%0.9850680.985068

Production Cost EstimatesVariable CostsLabor / unit4043.0446.3149.8353.6257.6962.08yearly increase% 0.0760.0760.0760.0760.0760.076

Material / unit7073.9978.2182.6787.3892.3697.62yearly increase%0.0570.0570.0570.0570.0570.057Material Transferred from Parent$US/unit60606060606060Material Transferred from Parent / unit30.6131.2531.7532.4332.9733.4733.97

Fixed CostsLicense Fees% of sales0.030.03300.03630.03990.04390.04830.0531yearly increase%0.100.100.100.100.100.10

Overhead Allocations% of sales0.050.05580.06220.06930.07730.08620.0961yearly increase%0.1150.1150.1150.1150.1150.115

TaxesEffective Tax Rate% in UK0.40.40.40.40.40.40.40.4Effective Tax Rate% in US0.3250.3250.3250.3250.3250.3250.3250.325Allowed losses carried forward?YESYESYESYESYESYESYESYESWitholding Tax% in UK0.110.110.110.110.110.110.110.11

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

Divdends to Parent% of CF0.500.500.500.500.500.500.500.50

AffiliateIncome Statement (figures in thousands)units19911992199319941995199619971998RevenueDemandEnglandunits750008456295343107499121205136658154081Franceunits00600007215086760104328125454Germanyunits0008000092520106999123744Total Demandunits7500084562155343259649300485347985403279Price/ unit250278308342380380380

Total Revenue18750000235082364784564488799958114184300132234300153246020Variable CostsLabor/ unit40434650545862Materials/ unit70747883879298Materials from Parent/ unit31313232333334

Total Variable Costs10545918125388532427459642823485522729776386123178104469

Gross Profit8204082109693832357104845976473619113236837306975141551

Fixed CostsLicense Fees56250077577217367973545782501531763889408144540Overhead Allocation93750013105842974145615470788242111139432114723410Witholding Taxes1650002294995182041067054152234819561592515475Total Fixed Costs16650002315855522914610767543153618761973942025383425Depreciation11071429110714291107142911071429110714291107142911071429

EBIT-4532347-2417901727047324137501354780193756222138686698Taxes001280909655001141912081502488815474679

Net Income-4532347-2417901714238314482501212868112253733223212019

Cash Flow Statement (figures in thousands)

Net Income-4532347-2417901714238314482501212868112253733223212019Depreciation11071429110714291107142911071429110714291107142911071429Working Capital Requirements-3750000-4701647-9569129-17759992-22836860-26446860-30649204Revovery of Working Capital30649204Costs-77500000

Cash Flow-7750000027890823951880864468377939389521380716190164932651Terminal Value9085608

PV Factor10.89890.80800.72630.65280.58680.52750.4741PV of CF-7750000025070403193035627840050881145587272377770635094474

NPV-15973958

Dividends Distributable13945411975940432234238969694760690358095032466326

ParentAfter-Tax Dividend Received by the Parent (in thousands)units19911992199319941995199619971998

Dividend Received13945411975940432234238969694760690358095032466326Witholding Taxes1533992173534754584286675236763939053571296

Grossed-Up Dividends (GBP)12411411758587384688434683024237014318704628895030

Grossed-Up Dividends (USD)$US620571897238200358518350812290278175112416117050

US Taxes$US2016852916026511655964017443405691155238041

Total Dividend Received by Parent418885605636135242012386791545938118200910879009

Present Value of Project (in thousands)

License Fees56250077577217367973545782501531763889408144540Materials Sold45000005073720932058015578940180291002087910024196740

Total Receipts506250058494921105737719124722230444172726804032341280Total Receipts$US25829083046610585046410337688126617681520954818312743

Taxes83944599014819014013359749411507449431035951641

After-Tax Receipts174346320564623949063697793985466931026644512361101

After-Tax Dividend418885605636135242012386791545938118200910879009

Recovered Working Capital30649204Project Cost-155000000Net Cash Flow-1550000002162348266209853014838216619100926311144845453889314PV Factor10.870.760.660.570.500.430.38PV of Cash Flow-15500000018803032012928348581146978785017821494948320258989NPV-112696786

cProject undesirable since NPV < 0

Other Factors to ConsiderSensitivity AnalysisIt would have been insightful to have more information on the risks that could stem from undertaking a foreign transaction such as this one. For example, as we can see in Britain right now with the upcoming election, the GBP is under a lot of duress and corporations are most certainly making contingency plans for possible referendums that might take place if the Labor party wins.From this information we could have conducted a sensitivity analysis with weighted probabilities of different outcomes to get a better picture of the ``true costs``Pound AssumptionsIt would seem that a constantly depreciating pound without the mention of inflation expectations and other factors is innapropriate.Without assessing the macro-environment and the differences in this environment between the US and GB, it is hard to just simply forecast exchange rates.I would feel a lot more comfortable using these exchange rate forecasts if more information was provided as to how they were estimated.Working CapitalAgain, just simply stating that WC needs will be 30% of sales or a net 20% would seem to predict that everyhing is going to run smoothly and that A/P will remain constant.Anyone who has looked at multi-nationals know that this is not the case. It would seem that forecasting working capital needs for a newly set-up affiliate is tougher than simply using a straight-line method.Had thes forecasts been for the paret company who has a longer history and better understanding of its WC needs, they could be forgiven but for a new venture in a foreign market, maybe a more conservative approach could have been applied.