Referring to the information provided in problems
8 and 9, inflation in the Philippines is expected to run at an annual rate of
8 percent over the next five years while the peso, currently trading at PHP 50 =
€1, is expected to depreciate at the rate of 5 percent against the euro over the
same period.
a. Does this confirm your recommendation reached in problem 9?
b. Cardiex fears that labor wage inflation in excess of the 8 percent inflation
already projected would jeopardize the economic logic of offshoring (labor
costs account for 50% of cost of goods sold). What is the maximum increase
in labor wages that would keep the offshoring plan worthwhile?
c. How would the imposition of an 8.5 percent ad valorem tariff by the European
Union on the importation of assembled defibrillators from the Philippines
change your recommendation?

Data from problem 8

Cardiex is a world-leading manufacturer of implantable defibrillators based in Maastricht (Netherlands). Gustav Lund, Cardiex’s senior vice president for production and logistics, is trying to decide whether to offshore the assembly of defibrillators to the Philippines. Medtronic—Cardiex’s key competitor—offshored more than a decade ago by opening a plant in Shen-Zhen

(China). Moving operations to the Philippines would allow Cardiex to take advantage of considerably cheaper labor costs resulting in lower cost of goods sold (currently at 72% final sales in Maastricht and expected to fall to 67% in the Philippines).

Data from problem 9

Referring to information provided in problem 8, Cardiex’s sales in the European Union are projected to remain stable at €100 million for the next 5 years. Show pro-form income and cash-flow statements for Cardiex manufacturing in the proposed offshore plant in the Philippines. Depreciation of property, plant, and equipment for the new facilities is straight-line over 10 years for an initial investment of €35 million. Selling, general, and administrative expenses are 8 percent of final sales while working capital is at 10 percent of final sales. The Philippines’ Ministry of Industry offers a tax holiday on the first five years of corporate income, and a subsidized PHP 2,000 million 5 year loan with interest-only at 7 percent. Cardiex is expecting to sell its plant at the end of five years for €17.5 million. Assuming that Cardiex would incur closure costs of €5 million at its Maastricht plant, would you advise Cardiex to move assembly to the new Philippines site? Assume that Cardiex’s risk adjusted cost of equity capital for this project is 8 percent and that the exchange rate PHP 50 = €1 remains stable over the next five years.