QUESTION 3 (24 MARKS) Jim Toreson, Chairman and CEO of Xebec Corporation, a Sunnyvale, California, manufacturer of diskdrive controllers, is trying to decide whether to switch to offshore production. Given Xebec's well-developed engineering and marketing capabilities, Toreson could use offshore manufacturing to ramp up production, taking full advantage of both low-wage labor and a grab bag of tax holidays, low-interest loans, and other government largess. Most of his competitors seem to be doing it. The faster he follows suit the better off Xebec would be according to the conventional discounted cash- flow analysis, which shows that switching production offshore is clearly a positive NPV investment. However, Toreson is concerned that such a move would entail the loss of certain intangible strategic benefits associated with domestic production. Required: a. What are some of the problems that MNC may encounter during their capital budgeting process? (6 marks) b. What might be some strategic benefits of domestic manufacturing for Xebec? Consider the fact that its customers are all U.S. firms and that manufacturing technology - particularly automation skills - is key to survival in this business. (6 marks) What analytical framework can be used to factor these intangible strategic benefits of domestic manufacturing (which are intangible costs of offshore production) into the factory location decision? (6 marks) d. Assess the possible reasons if the project had a large net positive present value and had a negative net present value. (6 marks) QUESTION 3 (24 MARKS) Jim Toreson, Chairman and CEO of Xebec Corporation, a Sunnyvale, California, manufacturer of diskdrive controllers, is trying to decide whether to switch to offshore production. Given Xebec's well-developed engineering and marketing capabilities, Toreson could use offshore manufacturing to ramp up production, taking full advantage of both low-wage labor and a grab bag of tax holidays, low-interest loans, and other government largess. Most of his competitors seem to be doing it. The faster he follows suit the better off Xebec would be according to the conventional discounted cash- flow analysis, which shows that switching production offshore is clearly a positive NPV investment. However, Toreson is concerned that such a move would entail the loss of certain intangible strategic benefits associated with domestic production. Required: a. What are some of the problems that MNC may encounter during their capital budgeting process? (6 marks) b. What might be some strategic benefits of domestic manufacturing for Xebec? Consider the fact that its customers are all U.S. firms and that manufacturing technology - particularly automation skills - is key to survival in this business. (6 marks) What analytical framework can be used to factor these intangible strategic benefits of domestic manufacturing (which are intangible costs of offshore production) into the factory location decision? (6 marks) d. Assess the possible reasons if the project had a large net positive present value and had a negative net present value. (6 marks)
