2. Impact of a Weak Currency on Feasibility of DFI. Packer, Inc., a U.S. producer of computer disks, plans to establish a subsidiary in Mexico in order to penetrate the Mexican market. Packer’s executives believe that the Mexican peso’s value is relatively strong and will weaken against the dollar over time. If their expectations about the peso value are correct, how will this affect the feasibility of the project? Explain.
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7.) Opportunities in Less Developed Countries. Offer your opinion on why economies of some less developed countries with strict restrictions on international trade and DFI are somewhat independent from economies of other countries. Why would MNCs desire to enter such countries? If these countries relaxed their restrictions, would their economies continue to be independent of other economies? 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?
15. DFI Strategy. JCPenney has recognized numerous opportunities to expand in foreign countries and has assessed many foreign markets, including Brazil, Greece, Mexico, Portugal, Singapore, and Thailand. It has opened new stores in Europe, Asia, and Latin America. In each case, the firm was aware that it did not have sufficient understanding of the culture of each country that it had targeted. Consequently, it engaged in joint ventures with local partners who knew the preference of the local customers.
a. What comparative advantage does JCPenney have when establishing a store in a foreign country, relative to an independent variety store?
b. Why might the overall risk of JCPenney decrease or increase as a result of its recent global expansion?
c. JCPenney has been more cautious about entering China. Explain the potential obstacles associated with entering China.
Chapter 14
2. Accounting for Risk. What is the limitation of using point estimates of exchange rates in the capital budgeting analysis?
List the various techniques for adjusting risk in multinational capital budgeting. Describe any advantages or disadvantages of each technique.
Explain how simulation can be used in multinational capital budgeting. What can it do that other risk adjustment techniques cannot?
9. Relevant Cash Flows in Disney’s French Theme Park.When Walt Disney World considered establishing a theme park in France, were the forecasted revenues and costs associated with the French park sufficient to assess the feasibility of this project? Were there any other “relevant cash flows” that deserved to be considered?
12.Impact of Reinvested Foreign Earnings on NPV. Flagstaff Corp. is a U.S.‑based firm with a subsidiary in Mexico. It plans to reinvest its earnings in Mexican government securities for the next 10 years since the interest rate earned on these securities is so high. Then, after 10 years, it will remit all accumulated earnings to the United States. What is a drawback of using this approach? (Assume the securities have no default or interest rate risk.)
16.Estimating the NPV. Assume that a less developed country called LDC encourages direct foreign investment (DFI) in order to reduce its unemployment rate, currently at 15 percent. Also assume that several MNCs are likely to consider DFI in this country. The inflation rate in recent years has averaged 4 percent. The hourly wage in LDC for manufacturing work is the equivalent of about $5 per hour. When Piedmont Co. develops cash flow forecasts to perform a capital budgeting analysis for a project in LDC, it assumes a wage rate of $5 in Year 1 and applies a 4 percent increase for each of the next 10 years. The components produced are to be exported to Piedmont’s headquarters in the United States, where they will be used in the production of computers. Do you think Piedmont will overestimate or underestimate the net present value of this project? Why? (Assume that LDC’s currency is tied to the dollar and will remain that way.)
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