Use the following information and assumptions to answer

Problems $18\mathrm{.}718\mathrm{.}10.$

Hermosa Beach Components, Inc., of California

exports $24,000$ sets of low$-$density light bulbs per year

to Argentina under an import license that expires in five

years. In Argentina, the bulbs are sold for the Argentine

peso equivalent of $$60$ per set. Direct manufacturing costs

in the United States and shipping together amount to $$40$

per set. The market for this type of bulb in Argentina is

stable, neither growing nor shrinking, and Hermosa holds

the major portion of the market.

The Argentine government has invited Hermosa

to open a manufacturing plant so imported bulbs can be

replaced by local production. If Hermosa makes the investment, it will operate the plant for five years and then sell

the building and equipment to Argentine investors at

net book value at the time of sale plus the value of any

net working capital. $($Net working capital is the amount

of current assets less any portion financed by local debt.$)$

Hermosa will be allowed to repatriate all net income and

depreciation funds to the United States each year. Hermosa traditionally evaluates all foreign investments in U$.$S$.$

dollar terms Investment. Hermosa$$s anticipated cash outlay in

U$.$S$.$ dollars in $2012$ would be as follows:

Building and equipment $$1,000,000$

Net working capital $1,000,000$

Total investment $$2,000,000$

All investment outlays will be made in $2012,$ and all

operating cash flows will occur at the end of years

$2013$ through $2017.$

$$ Depreciation and Investment Recovery. Building

and equipment will be depreciated over five years

on a straight$-$line basis. At the end of the fifth year,

the $$1,000,000$ of net working capital may also be

repatriated to the United States, as may the remaining net book value of the plant.

$$ Sales Price of Bulbs. Locally manufactured bulbs

will be sold for the Argentine peso equivalent of

$$60$ per set.

$$ Operating Expenses per Set of Bulbs. Material

purchases are as follows:

Materials purchased in Argentina

$($U$.$S$.$ dollar equivalent$)$ $$20$ per set

Materials imported from Hermosa

Beach $($U$.$S$.)10$ per set

Total variable costs $$30$ per set

$$ Transfer Prices. The $$10$ transfer price per set

for raw material sold by the parent consists of $$5$

of direct and indirect costs incurred in the United

States on their manufacture, creating $$5$ of pre$-$tax

profit to Hermosa Beach.

$$ Taxes. The corporate income tax rate is $40\%$ in both

Argentina and the United States $($combined federal

and state$/$province$).$ There are no capital gains taxes

on the future sale of the Argentine subsidiary, either

in Argentina or the United States.

$$ Discount Rate. Hermosa Components uses a $15\%$

discount rate to evaluate all domestic and foreign

projects.

$18\mathrm{.}7$ Hermosa Components: Baseline Analysis. Evaluate

the proposed investment in Argentina by Hermosa

Components $($U$.$S$.).$ Hermosa$$s management wishes

the baseline analysis to be performed in U$.$S$.$ dollars $($and implicitly also assumes the exchange rate

remains fixed throughout the life of the project$).$

Create a project viewpoint capital budget and a parent viewpoint capital budget. What do you conclude

from your analysis? if excel can be used that would be helpful. please go year by year so i can see the calculations and understand them