3. DFI to Achieve Economies of Scale Bear Co. and Viking, Inc., are automobile manufacturers that desire to benefit from economies of scale. Bear Co. has decided to establish distributorship subsidiaries in various countries, while Viking, Inc., has decided to establish manufacturing subsidiaries in various countries. Which firm is more likely to benefit from economies of scale?
6. Capitalizing on Low-Cost Labor Some MNCs establish a manufacturing facility where there is a relatively low cost of labor, but they sometimes close the facility later because the cost advantage dissipates. Why do you think the relative cost advantage of these countries is reduced over time? (Ignore possible exchange rate effects.)
9. DFI Strategy Bronco Corp. has decided to establish a subsidiary in Taiwan that will produce stereos and sell them there. It expects that its cost of producing these stereos will be one-third the cost of producing them in the United States. Assuming that its production cost estimates are accurate, is Bronco's strategy sensible? Explain.
12. Disney's DFI Motives What potential benefits do you think were most important in the decision of the Walt Disney Co. to build a theme park in France?
6. Impact of Financing on NPV Explain how the financing decision can influence the sensitivity of the net present value to exchange rate forecasts.
10. Capital Budgeting Logic Athens, Inc., established a subsidiary in the United Kingdom that was independent of its operations in the United States. The subsidiary's performance was well above what was expected. Consequently, when a British firm approached Athens about the possibility of acquiring the subsidiary, Athens' chief financial officer replied that the subsidiary was performing so well that it was not for sale. Comment on this strategy.
17. PepsiCo's Project in Brazil PepsiCo recently decided to invest more than $300 million for expansion in Brazil. Brazil offers considerable potential because it has 150 million people and their demand for soft drinks is increasing. However, the soft drink consumption is still only about one-fifth of the soft drink consumption in the United States. PepsiCo's initial outlay was used to purchase three production plants and a distribution network of almost 1,000 trucks to distribute its products to retail stores in Brazil. The expansion in Brazil was expected to make PepsiCo's products more accessible to Brazilian consumers.
a. Given that PepsiCo's investment in Brazil was entirely in dollars, describe its exposure to exchange rate risk resulting from the project. Explain how the size of the parent's initial investment and the exchange rate risk would have been affected if PepsiCo had financed much of the investment with loans from banks in Brazil.
b. Describe the factors that PepsiCo likely considered when estimating the future cash flows of the project in Brazil.
c. What factors did PepsiCo likely consider in deriving its required rate of return on the project in Brazil?
d. Describe the uncertainty that surrounds the estimate of future cash flows from the perspective of the U.S. parent.
e. PepsiCo's parent was responsible for assessing the expansion in Brazil. Yet, PepsiCo already had some existing operations in Brazil. When capital budgeting analysis was used to determine the feasibility of this project, should the project have been assessed from a Brazilian perspective or a U.S. perspective? Explain.
18. Impact of Asian Crisis Assume that Fordham Co. was evaluating a project in Thailand (to be financed with U.S. dollars). All cash flows generated from the project were to be reinvested in Thailand for several years. Explain how the Asian crisis would have affected the expected cash flows of this project and the required rate of return on this project. If the cash flows were to be remitted to the U.S. parent, explain how the Asian crisis would have affected the expected cash flows of this project.