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Founder and President of High and Dry Video (HDV), Genesha Pender, is considering opening a new production facility and/or expanding the current facility to meet
Founder and President of High and Dry Video (HDV), Genesha Pender, is considering opening a new production facility and/or expanding the current facility to meet demand for his company' s high definition video production equipment. Though a substantial portion of HDV' s sales are in the Europe, HDV currently only operates a production facility in the U.S.. HDV is considering expanding this facility or opening a new facility in Europe. The table below summarizes HDV"s expected cash flows in the current situation. Assume no tax, no depreciation, no change in net operating working capital (NOWC). Based on the information above and assuming a base scenario using the current exchange rate of $1 1/epsilon with 40%, chance, $1.0/epsilon with 50% chance and $1.2/epsilon with 10% chance. Calculate and explain HDV's operating exposure if it does not expand production in Europe. If HDV opens a new production facility in Europe, the production costs would be epsilon 145,000 per unit, plus an addition of epsilon1,000,000 in operating expenses at the new facility, everything else stays the same before. Discuss the following strategy that HDV might consider to manage the firm's operating exposure: Produce in each market the number of units HDV expects to sell. Be specific on the impact of this strategy on managing HDV's operating exposure
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