1. Puma invests in the Philippines (intermediate). The leading German sport equipment company, Puma, is reviewing a proposal to establish a sport shoe manufacturing plant in the Philippines. The investment will require initial capital of Philippine pesos (PHP) 50 million. The investment life is five years. Consider the proposed investment particulars:

■ Sales are projected to reach PHP 20 million the first year and to grow at the annual rate of 5 percent over the next five years.

■ Earnings before interest and tax, currently at PHP 15 million, will grow at the same rate as sales.

■ The inflation rate in the Philippines is currently 7 percent, and it is 2 percent in the United States. These rates are expected to remain constant during the next five years.

■ The corporate tax rate in the Philippines is 25 percent, and the withholding tax rate on dividend remittances is 10 percent.
■ Annual capital expenditure is equal to 50 percent annual depreciation expense.
■ Working capital requirement equals 10 percent of sales.
■ The terminal value of the plant at the end of the fifth year is expected to be PHP 15 million.
■ The spot exchange rate is PHP 50 per €1.
■ The company’s cost of equity capital is 15 percent.

a. Should the company set up the manufacturing plant in the Philippines, assuming that 100 percent of its sales are destined to the Philippine market?

b. Assuming that 100 percent of sales are expected to be exported to Japan, explain how you would adjust your analysis. What additional information is required to reach a decision?

c. What are the risks involved, and how would you account for them in your financial analysis?