Question
5. Whiz Computers Inc manufactures notebook personal computers. Whiz seeks to establish a manufacturing subsidiary in Europe, either in the UK, or in Germany. Presently,
5. Whiz Computers Inc manufactures notebook personal computers. Whiz seeks to establish a manufacturing subsidiary in Europe, either in the UK, or in Germany. Presently, the following summary of expected after-tax cash flows is available. Although most operating outflows would be in pounds or euros, some U.S. dollar cash expenses are necessary. The following are year-end cash flows; assume it is year-end 2018 right now. I would suggest working the problem out in a spreadsheet such as Excel.
Year
| 2019 | 2020 | 2021 | 2022 | 2023 | 2024 |
Proj 1 --Whiz UK CFs | ||||||
cash inflows |
| 5,000 | 3,600 | 4,000 | 5,000 | 6,000 |
cash outflows | 13,000 | 1,000 | 200 | 300 | 400 | 1,000 |
$ cash outflows |
| 100 | 120 | 150 | 150 | None |
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Proj 2 -- Whiz Germany CFs | ||||||
cash inflows |
| 6,000 | 5,000 | 5,000 | 6,000 | 6,500 |
cash outflows | 14,000 | 1,000 | 200 | 300 | 400 | 1,000 |
$ cash outflows |
| 100 | 120 | 150 | 150 | None |
Exchange rates are currently 0.67/$ and 0.77/$. Whizs currency advisor expects the UK pound to appreciate 4% per year against the dollar, and the euro to depreciate 2% per year against the dollar. If the US weighted average cost of capital for Whiz is 15% for both projects, which project looks most promising?
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