Capital Budgeting of Globalco Harvard Case Solution & Analysis

Capital Budgeting of Globalco Case Solution

The case discusses the importance of capital budgeting in the offshore, therefore Globalco decided to start its subsidiary operation in Europe. It was concerned about the economic activity that it could increase the return of investment and to provide better results to the parent company. It was analysed that a minimum amount of 100 million euro would require to manage the business activity. However, certain projected results show that how the company would be successful and overcome the changes occurred through the economic activity.

Projected Income Statement

From the results, it has been analysed that the total earnings for the company will generate better results in Euro, while the exchange rate under the dollar value will not show the desire level of returns due to less currency value of US as compared to Euro.

On the other hand, the expected sales volume will tend to increase over the year and therefore shows that the more earnings will flow out from the projected results. While in order to generate these results, the company should hedge its currency with Euro, which would be fixed in the selected years. This will help to maintain the ratio of profits and to reduce the level of risk by enter into the hedging agreement of both the currencies.

As far as the tax rate would tend to decrease from 30% to 25% so according to the situation, the level of earnings would be increased through-out the number of selected years and therefore generate the positive cash flows to the parent company. Thus, the only reason for lowering the taxes would be to increase the level of foreign direct investment in order to boost the economic efficiency.

 Net Present Value in Dollars and Euros

The cash flows generated in dollars show that Globalco might not produce the enough cash in its own currency because of less exchange rate. However, the higher discounted rate is being assumed because the economic conditions would not be favourable for the company to operate.

The other reasons could be the high cost of debt amount incurred during the operational activity.The net present value shows that Globalco should hedge the currency with Euro in order to mitigate the risk of inflation in the future and to maintain the NPV value throughout the number of selected years.

The case under the value of Euro indicates that the cash flows will be higher than that with dollars because of the appreciated currency value. Therefore, it has been determined that the operations in host country could produce better results due to low taxes as well as high earnings.Thus,the company should gofor hedge in order to overcome all the risks associated with it.

The discounted salvage value shows that it would likely to add in the cash flows every year due to investment in the manufacturing concerns. While the net value after investment shows a difference of $4435 in excess from Euro. Therefore,this value would be minimized if the currency exchange rate would be hedged to ten years of period.

Payback Period

From the projected results, it has been analysed that the average payback for both the currency scenarios would be recovered in the end of forth year,which indicates apositive sign of investment into the selected country.

The information would also be valuable to the potential shareholders, who could invest further in the project in order to increase the operation size and upgrade the efficiency level. This process is also useful for the company because it would know the potential benefits and loss through the initial investment amount.According to the projected payback period, it shows that the total positive amount in dollars was low as compared to the Euro due to low currency value................

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