FIN428 International Financial Management: Lamps Point Mexico Project

This assignment provides a solution to a foreign project valuation problem for Lamps Point Lighting, which is considering opening a manufacturing plant in Mexico. The analysis involves calculating the Net Present Value (NPV) of the project, considering factors such as initial investment, revenues, operating expenses, depreciation, interest on debt, taxes, withholding tax, changes in working capital, and exchange rates. The Weighted Average Cost of Capital (WACC) is also calculated to determine the appropriate discount rate for the NPV analysis. The conclusion recommends accepting the project due to the positive NPV, indicating that the expected revenues exceed the expenses. This document is available on Desklib, a platform offering a variety of study tools for students.

Running head: FINANCE
Finance

FINANCE 2
Cash Flow
Cash flow
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Initial expenses 15,000,000
Revenues 2400000
0
24768000 25560576 26378514.
43
27222626.
89
(-) Operating
expenses other
than depreciation
9,600,00
0
9907200 10224230.
4
10551405.
77
10889050.
76
Income from
operations
14,400,0
00
14,860,80
0
15,336,346 15,827,109 16,333,576
(-) Depreciation 1,500,00
0
1,500,000 1,500,000 1,500,000 1,500,000
EBIT 12,900,0
00
13,360,80
0
13,836,346 14,327,109 14,833,576
(-) Interest on
debt in foreign
country
1260000 1260000 1260000 1260000 1260000
EBT 11,640,0
00
12,100,80
0
12,576,346 13,067,109 13,573,576
(-) Taxes in
foreign country
4656000 4840320 5030538.2
4
5226843.4
64
5429430.4
55
Net income 6,984,00
0
7,260,480 7,545,807 7,840,265 8,144,146
(+ )Depreciation 1,500,00
0
1,500,000 1,500,000 1,500,000 1,500,000
CFs 8,484,00
0
8,760,480 9,045,807 9,340,265 9,644,146
(-) Withholding
tax/ blocked
funds
848400 876048 904580.73
6
934026.51
96
964414.56
82
CFs after
withholding tax
7,635,60
0
7,884,432 8,141,227 8,406,239 8,679,731
(-) Changes in
working capital
15,000,000 15,000,000
Total CFs
(foreign
currency)
30,000,000 7,635,60
0
7,884,432 8,141,227 8,406,239 23,679,731
Exchange rate 0.056 0.056 0.056 0.056 0.056 0.056
Net CFs
(domestic
currency)
1680000 427593.6 441528.1
92
455908.69
09
470749.36
59
1326064.9
42
Net present value

FINANCE 3
Net Present Value (subsidiary in Mexico)
Years Cash Flow PV
factor@6.94%
PV of cash flow (£’000)
0 -30,000,000 1.000 -30000000
1 7,635,600 0.935 7140078.549
2 7,884,432 0.874 6894298.014
3 8,141,227 0.818 6656858.183
4 8,406,239 0.765 6427483.902
5 23,679,731 0.715 16930737.168
5 0.715 0.000
Total present
value of cash
flow
14049455.82
Net Present Value 14049455.82
WACC calculation
WACC calculations
Cost Weight Weighted cost
cost of equity 9.85% 40.00% 3.940%
Cost of debt 1 5.40% 46.67% 2.520%
Cost of debt 2 3.60% 13.33% 0.480%
WACC 30000000 6.940%
Investment decision
From the NPV analysis, it is stated that there is positive NPV value i.e. 14049455.82. It indicates
that Lamps Point Lighting should accept to open a subsidiary in Mexico because value of the
revenues (cash inflows) is higher than the expenses (cash outflows) (Barr, & McClellan, 2018).

FINANCE 4
References
Barr, M. J., & McClellan, G. S. (2018). Budgets and financial management in higher education.
USA: John Wiley & Sons.