1. *Wewp01 and associates, a US MNE, join forces with Wasniowska, a Polish national, who is well versed in the Polish culture, as a minority shareholder, and invest $1 million in Poland in a furniture factory. The information we have is as follows. The European Union subsidizes the investment up to 60% of the cost and 40% of the interest. Thus, we borrow $3 million and receive $6 million free money from the EU. The prognosis of the project’s profitability is that revenue the first ten years will be $5million, the cost of goods sold will be $2.5 million, the SGA expenses will be $1 million and the tax rate will be 20%. Furthermore, the Polish T bond rate is 8%, the bond rate for wp01/Wasniowska is 12%, the bheta of this firm is 2, and the ROR for the Polish stock market has been 14% annually. After the first ten year period, the NCF and the expenses will grow forever at a 2% growth rate.
Moreover, the zloty, the polish currency, has had weakness against the US $ and the euro and all currencies during the 10 year analysis, and the forecast is that this experience will continue. Furthermore, the price elasticity of demand of furniture in the world (which is the market for this factory) is 6 (this matters in connection with the weak value of the zloty relatively to the other currencies.) The income elasticity of demand is extremely high, as well, hovering at about 5. The prognosis is that incomes will continue to increase in the markets of this factory.
a. Compute the NCF, COC and NPV of wp01/Wasniowska.(10 points)
b. Explicate this FDI from a behavioral viewp01oint.(8 points)
c. Analyze the economic reasons for this FDI.( 7 points)

a)
Desc Info

Cost of Furniture Factory 10,000,000
Government Subsidy 60% 6,000,000
Investment 1,000,000
Debt 3,000,000
Total Cost 10,000,000
Government Subsidy 60% 6,000,000
Net Cost 4,000,000
Interest rate 12%
Total Interest 360,000
Government Subsidy 40% of interest 40.00%
Government Subsidy 40% of interest 144,000
Company Interest Expense 216,000
20 straight line depreciation per year 500,000

Total Revenue
Total Revenue first 10 years 5,000,000
Operational expense 3,500,000

Tax rate 20%

Polish T Bond 8%
Risk Premium 6%
Market Rate 14%
Bheta 2

COE=Rf + (Rm -Rf)B 20%

To calculate WACC, multiply the cost of each capital component by its proportional weight and take the sum of the results. The method for calculating WACC can be expressed in the following formula:

Where:
Re = cost of equity

Rd = cost of debt

E = market value of the firm’s equity
D = market value of the firm’s debt

V = E + D = total market value of the firm’s financing (equity and debt)
E/V = percentage of financing that is equity
D/V = percentage of financing that is debt
Tc = corporate tax rate
Rate
Greek T Bond 8%
Risk Premium 6%
Market Rate 14%
Bheta 2

COE=Rf + (Rm -Rf)B 20%

Interest Rate 12%

Tax rate 20.00%
Government Subsidy of interest 40.00%

Debt 3,000,000
Equity 1,000,000
Total Cost 4,000,000

E/V 25.00%
RE = COE 20.00%
E/V * COE 5.00%

D/V 75.00%
RD = COD – not Correct 7.20%
D/V * COD 5.40%

(1-tc) 80.00%

D/V *RD*(1-t) 4.30%

WACC 9.32%

1 Year Income Statement 10 Year Income
Furniture Factory 5,000,000 50,000,000
Other –
Revenue 5,000,000 50,000,000
–
COGS 2,500,000 25,000,000
SGA 1,000,000 10,000,000

Expenses 3,500,000 35,000,000

EBIT 1,500,000 15,000,000

Tax 300,000 3,000,000

Net Income 1,200,000 12,000,000

Interest @ .60% 216,000 2,160,000

EAT 984,000 9,840,000

Operating Cash Flow
NCF= 1) EBIT operating profit 1,500,000
+ 2) Depreciation 500,000
– 3) Taxes (300,000)
NCF 1,700,000

10 Year NPV = -$4,000,000 + ($1,700,000 *((1-(1/ (1+.0932)10 ))/.0932))
10 Year NPV = $6,758,015

NPV 10+ = (NCF* (1 + G) / (WACC-G))/ (1 + WACC)10 – present value of now
NPV 10+ =($1,700,000*(1+0.02)/(0.0932-0.02))/((1+0.0932)^10)
NPV 10+ = $9,717,214
NPV = $6,758,015 + $9.717.214
NPV = $16,475,229