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CASE STUDY

Question

1. This project seems reasonable to Clover Machines because the growth of eastern economies including Russia may increase the demand for machinery.A high demand may boost up the sales by Clover Machines and achieve higher sales growth. It’s also expected that the growth rate for farm equipment in Europe may at least to double the rate of productivity, which is pegged at 4% Besides that, the penetration of market by others competitors is low and hence it may decrease the threat by competitor in term of price competiton.

2.
YearTerm structureTerm StructureExchange rateColumn1
USDCZKUSD CZKCZK USD
Year

025.00000.0400
12.50%4.50%25.48780.0392
23.00%5.20%26.03220.0384
33.10%6.00%26.76440.0374
43.50%7.00%27.66950.0361
54.00%7.00%28.46770.0351

The expected future spot rates is based on the Interest Rate Parity (IRP). Based on IRP, if foreign interest rate is higher than domestic interest rate, than the corresponding foreign currency forward rate will be less than the spot rate. The limitation of this theory is when the default risk varies, the interest rate levels in various countries may reflect not only the forward premium but also differential levels of default risk.

3.

Year
012345
Investment CF
Capital expenditure-875000000
Salvage200000000
Taxes (Salvage)40000000
Change in NWC-100000000100000000

Investment CF-975000000000060000000

Operating CF
Revenue900000000900000000900000000900000000900000000
Export cost375000000375000000375000000375000000375000000 Assembly cost6000000060000000600000006000000060000000
Overhead cost2000000020000000200000002000000020000000
Dealer incentives and bonus9000000090000000900000009000000090000000 Depreciation175000000175000000175000000175000000175000000

Pretax income180000000180000000180000000180000000180000000 Taxes...
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