When a multinational entity wants to expand its operation it must consider the risk of the investment in the new venture, and particularly so, if the investment is taking place in a foreign country.

Sterling Drugs Ltd., a UK based company, is considering setting up a facility in Jamaica to manufacture some of its products in Jamaica for sale in Jamaica and the Caribbean.

Explain to the company all the likely risks associated with this venture. The proposed investment is J$600 million; the projected EBIT for the next 3 years are: J$60 million in year 1, J$86 million in year 2, and J$172 million in year 3. The projected exchange rates for the three years are as follows: 1.00 = J$180 in year 1, 1.00 = J$189 in year 2, and 1.00 = J$194 in year 3.

The capital structure of the Jamaican venture is 40% equity, 20% 9% preference shares, and 40% 8% 10-year debt. The expected marginal tax rate is 30% annually. (20 marks)