The Bombay Duck Company Case Harvard Case Solution & Analysis

Introduction:

 The Bonito Azul Cannery Company is located in Los Angeles, U.S.A. The company is considering a plan to open a wholly-owned subsidiary in India to produce a local delicacy known as Bombay duck.

The plan includes buying the fishes from the local fisherman, drying it, and then distributing them to Indian Restaurants in the United States. The sales of the company will be in the U.S. dollars and costs will be in Indian rupees.

The plant needed for the project will cost the company $10 million and the land and docking facilities will cost around $2 million. The income tax in both countries is different. The tax on income in India is 25% and the tax in U.S is 40%. However, the tax is entitled to a credit equals to the amount of tax paid in India.

Project:

 The project is fore casted to last for 10 year and is expected to record the sales of$15 million annually. The cost of fish, administrative expenses and depreciation is $12.5 million and the profit before tax is $2.5 million with the Indian income tax of $0.62 million. The profit after tax is $1.85 million.

Value of All- Equity Project:

 The cost of equity with CAPM model is 25%. The value of the project for 10 years is $7.55 million. The value is derived by calculating the free cash flows for the project. The EBIT is taken and then the U.S tax is deducted and then India’s tax is added back. The depreciation is added back in and capital expenditure of $1.5 million is deducted in the first year. The free cash flows arising in the 10 years are $950000 for the first year and $2450000 for the rest of nine years..........................

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