1. Assume that Wolverine expects to receive NZ$500,000 at the end of Year 1. The existing spot rate of the New Zealand dollar is $0.60, while the one-year forward rate is $0.62. Wolverine has created a probability distribution for the future spot rate in one year as follows:

Future Spot Rate	Probability
$0.61	20%
$0.63	50%
$0.67	30%

Assume that one-year put options on New Zealand dollars are available with an exercise price of $0.63 and a premium of $0.04 per unit. One-year call options on New Zealand dollars are available with an exercise price of $0.60 per unit. Assume the following money market rates:

United States	New Zealand
Deposit Rate	8%	5%
Borrowing Rate	9%	6%

Given the above information, determine whether a forward hedge, money market hedge, or currency options hedge would be most appropriate to mitigate currency risk. Then, compare your choice of hedging technique to an unhedged strategy and recommend whether Wolverine should hedge its receivables.

1. Assume that Wolverine expects to need NZ$1 million in one year to meet its short-term obligations (for example, accounts payable). Using any relevant information from Part 4, determine whether a forward hedge, money market hedge, or a currency options hedge would be the most appropriate tool. Then, compare your choice with an unhedged strategy and decide whether Wolverine should hedge its payables positions.
2. Assume that Wolverine uses the original financing proposal in Part 1 and that funds are blocked until the subsidiary is sold. The funds to be remitted are reinvested at a rate of 6%, after taxes, until the end of Year 3. How is the project NPV affected by this scenario?
3. What is the break-even salvage value of this project if Wolverine uses the original financing proposal and funds are not blocked? Discuss your answer.
4. Assume that Wolverine decides to implement the project using the original financing proposal. Also assume that after one year, a New Zealand firm offers Wolverine a price of $27 million after taxes for the subsidiary and Wolverine's original forecasts for Years 2 and 3 have not changed. Should Wolverine accept or reject the offer? Explain.
5. Based on the information gathered above, what are some unique challenges that MNCs encounter in their global investment and financing decisions? How should they effectively deal with these challenges in an era of increasing globalization of business activities?

Capital Budgeting Analysis: Wolverine Corporation Year 0 Year 1 Year 2 Year 3 1 2 3 4 Demand Price per unit Total revenue = (1) (2) Variable cost per unit 40,000 NZ$500 NZ$20,000,000 NZ$30 50,000 NZ$511 NZ$25,550,000 NZ$35 60,000 NZ$530 NZ$31,800,000 NZ$40 5 Total variable cost = (1) (4) NZ$1,200,000 NZ$1,750,000 NZ$2,400,000 6 Fixed cost NZ$6,000,000 NZ$6,000,000 NZ$6,000,000 7 Interest expense of New Zealand loan NZ$2,800,000 NZ$2,800,000 NZ$2,800,000 8 Noncash expense (depreciation) NZ$5,000,000 NZ$5,000,000 NZ$5,000,000 9 Total expenses = (5)+(6)+(7)+(8) NZ$15,000,000 NZ$15,550,000 NZ$16,200,000 10 Beforetax earnings of subsidiary = (3)-(9) NZ$5,000,000 NZ$10,000,000 NZ$15,600,000 NZ$1,500,000 NZ$3,000,000 NZ$4,680,000 NZ$3,500,000 NZ$7,000,000 NZ$10,920,000 NZ$8,500,000 NZ$12,000,000 NZ$15,920,000 NZ$8,500,000 NZ$12,000,000 NZ$15,920,000 NZ$850,000 NZ$1,200,000 NZ$1,592,000 NZ$7,650,000 NZ$10,800,000 NZ$14,328,000 11 Host government tax (30%) 12 Afertax earnings of subsidiary to subsidiary 13 Net cash=flow (12)+(8) NZ$ remitted by sub. (100% of CF) 14 tax imposed 15 Withholding on remitted funds (10%) 16 NZ$ remitted afer withholding taxes 17 18 19 Salvage value Exchange rate of NZ$ Cash flows to parent $ 0.52 3,978,000.00 $ 20 PV of parent cash flows (20% of discount rate) $ 3,978,000.00 $5,832,000 ($12,685,000) ($17,635,000) NZ$52,000,000 0.54 0.56 6,415,200.00 $ 8,023,680.00 $37,143,680 21 Initial investment by parent ($25,000) 22 Cumulative NPV of cash flows $3,860,185 References Armeanu, D., & Lache, L. (2009). The NPV criterion for valuing investments under uncertainty. Economic Computation and Economic Cybernetics Studies and Research, 43(4), 143 Author, A. (date not given). Pvtables.xls. provided by Luis Rivera PhD. AccountingTools. (2016). Straight line depreciation. CPE for CPAs. Retrieved from http://www.accountingtools.com/straight-line-depreciation Mandura, R. (2015). International Financial Management. (12th ed.). Stamford: CT. Cengage. ISBN-13: 978-1-133-94783-7 Spiegelman, R. (2016, Jan 12). Taxes: What's new for 2016? charles SCHWAB. Retrieved from http://www.schwab.com/public/schwabn/articles/Taxes-Whats-New and Research, 43(4), 143- -Whats-New 156 Capital Budgeting Analysis: Wolverine Corporation Alternative Year 0 Alternative Year 1 Alternative Year 2 1 2 3 Demand Price per unit Total revenue = (1) (2) 40,000 NZ$500 NZ$20,000,000 50,000 NZ$511 NZ$25,550 4 Variable cost per unit NZ$30 NZ$35 5 6 Total variable cost = (1) (4) Fixed cost NZ$1,200,000 NZ$6,000,000 NZ$1,750,000 NZ$6,000,000 7 Interest expense of New Zealand loan NZ$0 NZ$0 8 Noncash expense (depreciation) NZ$5,000,000 NZ$5,000,000 9 Total expenses = (5)+(6)+(7)+(8) NZ$12,200,000 NZ$12,700,000 10 Beforetax earnings of subsidiary = (3)-(9) NZ$7,800,000 NZ$12,800,000 11 Host government tax (30%) NZ$2,340,000 NZ$3,840,000 NZ$5,460,000 NZ$13,900,000 Net cash flow to subsidiary = (12)+(8) NZ$5,460,000 NZ$13,960,000 NZ$ remitted by sub. (100% of CF) NZ$10,460,000 NZ$13,960,000 15 Withholding tax imposed on remitted funds (10%) NZ$1,046,000 NZ$1,396,000 16 NZ$ remitted afer withholding taxes NZ$9,414,000 NZ$12,564,000 17 18 19 Salvage value Exchange rate of NZ$ Cash flows to parent 0.52 $4,895,280 0.54 $6,784,560 $4,079,400 $4,711,500 12 Afertax earnings of subsidiary 13 14 cash flows (20% of 20 PV of parent discount rate) 21 Initial investment by parent 22 Cumulative NPV of cash flows $ (35,000) $ (30,920,600.00) ($26,209,100) References Armeanu, D., & Lache, L. (2009). The NPV criterion for valuing investments under uncertainty. Economic Computation and Economic Cybernetics Studies and Research, 43(4) Author, A. (date not given). Pvtables.xls. provided by Luis Rivera PhD. AccountingTools. (2016). Straight line depreciation. CPE for CPAs. Retrieved from http://www.accountingtools.com/straight-line-depreciation Mandura, R. (2015). International Financial Management. (12th ed.). Stamford: CT. Cengage. ISBN-13: 978-1-133-94783-7 Spiegelman, R. (2016, Jan 12). Taxes: What's new for 2016? charles SCHWAB. Retrieved from http://www.schwab.com/public/schwabn/articles/Taxes-Whats-New Alternative Year 3 60,000 NZ$530 NZ$31,800,000 NZ$40 NZ$2,400,000 NZ$6,000,000 NZ$0 NZ$5,000,000 NZ$13,400,000 NZ$18,400,000 NZ$5,520,000 #VALUE! NZ$17,880,000 NZ$17,880,000 NZ$1,788,000 NZ$16,092,000 NZ$70,000,000 0.56 $48,211,520 $27,900,185 $1,691,085 nces r uncertainty. tics Studies and Research, 43(4), 143- depreciation CT. Cengage. trieved from ticles/Taxes-Whats-New 156