- Refer to Centralia case
- Create an Excel spreadsheet to demonstrate how to calculate the benefit of using concessionary loan
Case Study: Centralia Corporation AUS manufacturer of small kitchen electrical appliances currently sells microwaves in Spain through an affiliate. Current sales are 9,600 units/year and increasing at a rate of 5%. Price is $180 per unit, of which $35 represents the profit margin and expected to increase with inflation. Centralia's Capital Expenditure Project: To build a manufacturing facility in Zaragoza, Spain Cost of plant is 5,500,000 Creates a borrowing capacity $2,904,000; New plant will be depreciated over 8 years; Centralia will get a special financing deal: O 4,000,000 at 5% per year; Normal borrowing rate is 8% in dollars and 7% in ; O Principal to be repaid in eight equal installments; Sales to EU forecast at 25,000 units in the first year and expect to increase by 12% per year Sales price is 200/unit and production cost is 160/unit in the 1st year O Both are expected to increase with inflation. Other Information Madrid sales affiliate accumulated a net amount of 750,000 from its operations, which can be used to partially finance construction cost (this is an example of RF); The accumulated funds (750,000) were earned under special tax concessions and taxed at a marginal rate of 20%. Expected inflation: 2.1% in Spain; 3% in the U.S The current exchange rate: $1,32/. Marginal tax rate in Spain and the U.S.: 35% Dollar all-equity cost of capital: 12% Should Centralia take the project? Case Study: Centralia Corporation AUS manufacturer of small kitchen electrical appliances currently sells microwaves in Spain through an affiliate. Current sales are 9,600 units/year and increasing at a rate of 5%. Price is $180 per unit, of which $35 represents the profit margin and expected to increase with inflation. Centralia's Capital Expenditure Project: To build a manufacturing facility in Zaragoza, Spain Cost of plant is 5,500,000 Creates a borrowing capacity $2,904,000; New plant will be depreciated over 8 years; Centralia will get a special financing deal: O 4,000,000 at 5% per year; Normal borrowing rate is 8% in dollars and 7% in ; O Principal to be repaid in eight equal installments; Sales to EU forecast at 25,000 units in the first year and expect to increase by 12% per year Sales price is 200/unit and production cost is 160/unit in the 1st year O Both are expected to increase with inflation. Other Information Madrid sales affiliate accumulated a net amount of 750,000 from its operations, which can be used to partially finance construction cost (this is an example of RF); The accumulated funds (750,000) were earned under special tax concessions and taxed at a marginal rate of 20%. Expected inflation: 2.1% in Spain; 3% in the U.S The current exchange rate: $1,32/. Marginal tax rate in Spain and the U.S.: 35% Dollar all-equity cost of capital: 12% Should Centralia take the project
