Based on your huge success with the WSOM Spirit shop, you decide to begin selling a WSOM-branded electric scooter. The choice at hand is whether to produce it yourself in a factory you would build in Cleveland or, establish a joint venture (JV) with a government-run scooter manufacturer in Kreplachistan (former Soviet republic made famous in the Austin Powers movie). The Kreplachistani government will subsidize 50% of your initial capital investment costs in the JV (you will receive the proceeds up-front). You would import Kreplachani built scooters using ocean freight. You can pack 115 scooters into each shipping container. Your business plan calls for you to make and sell 1000 Scooters a year for the next ten years.

Key assumptions include the following: The cost of capital is 10% Kreplach/$ Conversion rate: 3KP = $1 currently Labor inflation: zero in both locations Cost comparison: Cleveland Kreplachistan

• • Upfront Investment $750,000 3,000,000 KP
  • Subsidy (upfront) $0 1,500,000 KP
  • Component cost (per unit) $45 100 KP
  • Assembly cost (per unit) $25 35 KP
  • Inbound shipping (per container) $0 6000 KP

Questions:

1. Based on your analysis, which sourcing alternative has advantaged economics over the ten-year duration? By how much? You must show your assumptions and calculations for full credit. [2.5 points]
2. Cleveland's new mayor (a WSOM graduate!) institutes a 10% tariff² on all goods imported into Cleveland. Under this new assumption, which sourcing alternative has now advantaged economics over the ten-year duration? By how much? What happens to the economics if the tariff increases to 50%? You must show your assumptions and calculations for full credit [1 point]
3. Based on some new analysis, your advisors indicate that the Kreplach (the currency of Kreplachistan) is likely to strengthen¹ against the dollar at a 7.5% annual rate (e.g., in future years the same number of Kreplachs will buy more dollars). You are told that this is due to strong fiscal management (the head of the central bank is a WSOM MBA alumnus)! Under this new assumption, which sourcing alternative has now advantaged economics over the ten-year duration? By how much? Assume that the 10% tariff is in place. You must show your assumptions and calculations for full credit. [1 point]