Please write a one-page report to explain whether or not Dorchester, Ltd. Should build the new manufacturing plant in the United States?
[Please see excel calculations below]
When a company is looking to start up a new project it’s important for them to forecast whether or not the project will be profitable or not. They can’t just outline the projected profit from the project without considering the cost of raising capital to finance that project. This is traditionally done in financing through equity or debt with the net present value formula. However for an MNC they also face additional risks when looking at international finance. They have the added risks of exchange rate, different inflation rates, and different interests in the host or parent’s capital markets. They also have political risks associated with it with trying to repatriate profits back to the parent company that could prove difficult due to political unrest or regulations for MNC’s preventing them.
In the case of Dorchester the political risks between the US and the UK are near zero with the outgoing business relations the two countries have. However, this is an international finance project with funds coming from either England or from the US through debt financing. The consideration of different inflation rates needs to be understood in this project and the different interest rates for financing. So when looking at this type of financing it is better to use the APV compared with the NPV, as it looks at individual cash flows and adjust them according. As you can see below a traditional NPV and APV with debt financing was calculated. It would be more beneficial for Dorchester to finance this project partly through debt as they could realize some tax savings. These figures were created following the flow of the powerpoint in week 9.
|Dorchester Finance Options...