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Case 1 You have just graduated from the MBA program of a large university, and one of your favorite courses was\"Today's Entrepreneurs.\"In fact, you enjoyed it so much you have decided you want to\"be your own boss.\"While you were in the master's program, your grandfather died and left you $1 million to do with as you please. You are not an inventor, and you do not have a trade skill that you can market; however, you have decided that you would like to purchase at least one established franchise in the fast foods area, maybe two (if profitable). The problem is that you have never been one to stay with any project for too long, so you figure that your time frame is 3 years. After 3 years you will go on to something else. You have narrowed your selection down to two choices: (1) Franchise L, Lisa's Soups, Salads, & Stuff, and (2) Franchise S, Sam's Fabulous Fried Chicken. The net cash flows shown below include the price you would receive for selling the franchise in Year 3 and the forecast of how each franchise will do over the 3year period. Franchise L's cash flows will start off slowly but will increase rather quickly as people become more healthconscious, while Franchise S's cash flows will start off high but will trail off as other chicken competitors enter the marketplace and as people become more health conscious and avoid fried foods. Franchise L serves breakfast and lunch whereas Franchise S serves only dinner, so it is possible for you to invest in both franchises. You see these franchises as perfect complements to one another: You could attract both the lunch and dinner crowds and the healthconscious and notsohealthconscious crowds without the franchises directly competing against one another. Here are the net cash flows (in thousands of dollars): Year 0 1 2 3 Expected Net Cash Flows Franchise L -100 10 60 80 Franchise S -100 70 50 20 Depreciation, salvage values, net working capital requirements, and tax effects are all included in these cash flows. You also have made subjective risk assessments of each franchise and concluded that both franchises have risk characteristics that require a return of 10%. You must now determine whether one or both of the franchises should be accepted. 1.You are also considering another project that has a physical life of 3 years; that is, the machinery will be totally worn out after 3 years. However, if the project were terminated prior to the end of 3 years, the machinery would have a positive salvage value. Here are the project's estimated cash flows: Year 0 1 2 Expected Net Cash Flows Franchise L -100 10 60 Franchise S -100 70 50 3 80 20 Using the 10% cost of capital, what is the project's NPV if it is operated for the full 3 years? Would the NPV change if the company planned to terminate the project at the end of Year 2? At the end of Year 1? What is the project's optimal (economic) life? Case 2 With the growth in demand for exotic foods, Possum Products's CEO Michael Munger is considering expanding the geographic footprint of its line of dried and smoked lowfat opossum, ostrich, and venison jerky snack packs. Historically, jerky products have performed well in the southern United States, but there are indications of a growing demand for these unusual delicacies in Europe. Munger recognizes that the expansion carries some risk. Europeans may not be as accepting of opossum jerky as initial research suggests, so the expansion will proceed in steps. The first step will be to set up sales subsidiaries in France and Sweden (the two countries with the highest indicated demand), and the second is to set up a production plant in France with the ultimate goal of product distribution throughout Europe. Possum Products's CFO, Kevin Uram, although enthusiastic about the plan, is nonetheless concerned about how an international expansion and the additional risk that entails will affect the firm's financial management process. He has asked you, the firm's most recently hired financial analyst; to develop a 1hour tutorial package that explains the basics of multinational financial management. The tutorial will be presented at the next board of directors meeting. To get you started, Uram has supplied you with the following list of questions. Questions I. What effect does relative inflation have on interest rates and exchange rates? J. Briefly discuss the international capital markets. K. To what extent do average capital structures vary across different countries? L. Briefly describe special problems that occur in multinational capital budgeting, and describe the process for evaluating a foreign project. Now consider the following project: A U.S. company has the opportunity to lease a manufacturing facility in Japan for 2 years. The company must spend 1 billion initially to refurbish the plant. The expected net cash flows from the plant for the next 2 years, in millions, are CF1= 500 and CF2= 800. A similar project in the United States would have a riskadjusted cost of capital of 10%. In the United States, a 1year government bond pays 2% interest and a 2year bond pays 2.8%. In Japan, a 1year bond pays 0.05% and a 2year bond pays 0.26%. What is the project's NPV? M. Briefly discuss special factors associated with the following areas of multinational working capital management: (1) Cash management (2) Credit management (3) Inventory management