Finance for International Business: Project Analysis Report

This report presents a comprehensive analysis of Hatfield Manufacturing's proposed investment in Turkey. It begins with an introduction outlining the project's objectives and the rationale for expanding operations in Turkey, driven by favorable economic factors such as lower labor costs and government incentives. The discussion and analysis section delves into project analysis, detailing the investment of TL 115 million, with a focus on machinery costs and revenue projections. An economic analysis examines inflation and currency fluctuations, highlighting the impact of the Turkish Lira's depreciation. Cash flow analysis includes revenue growth, variable costs, labor costs, and fixed costs, along with depreciation calculations and discounted cash flow analysis, leading to a Net Present Value (NPV) of TL 27.692 million and £ 3.14 million. Foreign exchange exposure/risk is considered, emphasizing the need for risk management strategies due to currency volatility. The weighted average cost of capital (WACC) is determined using the cost of equity and debt, assessing project risk. The conclusion supports the investment based on positive NPV and IRR results, with recommendations for risk management and long-term investment strategies. The report references relevant financial literature to support its findings.

Running head: INTERNATIONAL FINANCE
International Finance
Name of the Student:
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Author’s Note:

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Table of Contents
Introduction......................................................................................................................................2
Discussion and Analysis..................................................................................................................2
Project Analysis...........................................................................................................................2
Economy Analysis.......................................................................................................................3
Cash Flow Analysis.....................................................................................................................3
Foreign Exchange Exposure/Risk................................................................................................5
Weighted Average Cost of Capital..............................................................................................5
Conclusion.......................................................................................................................................6
Recommendations............................................................................................................................7
References........................................................................................................................................8
Appendix..........................................................................................................................................9

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Introduction
The project investment analysis of the company has been done with the help of the
capital investment that will be done by the Hatfield Manufacturing Company for the purpose of
increasing the business operations of the company. The project investment will be done in
Turkey whereby the company will be investing around TL 110 Million, which would be
including the cost of plant as well as the cost of machinery that the company will be using for the
purpose of its operations. All the cash investment that the company expects to incur will be done
in the Turkish Currency. The evaluation and the final value derived in terms of Turkish Currency
will be converted into the UK British Pound for the purpose of evaluating the financial viability
of the project. The key reason that the company is considering or undertaking for the purpose of
expanding the business operations in Turkey economy is primarily due to the positive economic
factors that would be helping the company operate at a lower cost of labor and other costs that
the company would be incurring. Increased efforts from the Turkish Government in terms of tax
cuts or lower tax rates on the profitability earned are some of the other key reason for which the
investment is done in the Turkish Economy.
Discussion and Analysis
Project Analysis
The project investment that has been done by the company is well considered from the
view point of investment in Turkish Economy whereby the Hatfield Company will be investing
around TL 115 Million and of which 15 Million will be the considerable amount for the
Machinery investment done. The machinery will be treated as a non-cash expense which would

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be charged on a straight line basis for the company. The annual revenue that would be earned by
the company from selling the product will be the primary source of income for the Hatfield
Company Investment Project (Coleman et al. 2013). It is important to note that the expenses that
the company will be incurring will be primarily in the form of Variable Cost, Labour Costs and
Fixed Costs that the company will be incurring for the term period. The term period of
investment for the project will be five years whereby the investment viability would be
considered.
Economy Analysis
It is important that the economy analysis or country analysis should be well conducted by
the company with the help of macro-economic and business factors that might influence the
operations and the overall profitability of the project investment that would be done. The
economic analysis of the economy was viewed in terms of inflation level which could be well
compared or analysed with the help of UK CPI % which has been remained constant in the trend
period of 10-years that has been analysed (Schlegel, Frank and Britzelmaier 2016). The inflation
level in Turkey economy has been comparatively very high as compared to the UK economy
which in turn has led to the depreciation of the YTL/£ which has fallen considerably from 2.8890
in the year 2013 to around 4.3909 YTL/£ in the year 2015. However, some of the key positive
factors that would be positively affecting the business operations of the company will be
primarily in the form of cheap labour availability and the costs of operation that is the variable
cost that would be incurred in the business operations of the company.
Cash Flow Analysis
The cash flow analysis would be done based on the major cash inflows for the company
which will be coming from the revenue of sales of products that the company expects to sell to

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its wide range of customers. The key and important thing that should be well considered for the
purpose of analysis is the growth rate of revenue which is expected to be around 12% for the
company in the five year trend period. The sales that the company expects in the first year is
around TL15.518 Million and which is expected to grow at a rate of 12%. The variable cost that
the company expects to incur in the first year is around TL0.954 Million and which is expected
to grow at a rate of 1.50% for the five year period. The labor costs that the company expects to
incur is around TL0.513 Million and will be around 2%. On the other hand, the other key
expenses that the company expects to incur will be primarily in the form of fixed costs that the
company will be incurring which will grow at a rate of 1.00% for the company.
It is important to note that Depreciation will be treated as a non-cash expense which will
treated in the income statement of the company and would be treated as a non-cash expenses and
would be providing the company with the tax shield on the cash flows reported. The depreciation
amount has been calculated based on the straight line method and the salvage value that would
be zero for the company. The total expenses that has been reported by the company for the first
year was around TL4,111 and the same has been calculated for all of the following years. The
discounted cash flows has been well derived by the company by taking the discount rate of about
7.98% for the company. In order to determine or get the free cash flows for the company
depreciation expenses was added back to the cash flows analyzed for the company (Abdel-
Kader, Dugdale and Taylor 2018). The discounted cash flows on a summed basis would be
giving us the net present value for the firm investment project which came to around TL27.692
Million at today’s point of time. On the other hand it is important to that Hatfield Company is
evaluating the investment plan from the view perspective of the UK Economy and by using the
current spot rate which was around 8.83 the value or NPV of the project is £ 3.14 Million. In

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terms of excess percentage return that has been generated by the project captured in the form of
Internal rate of return for the project was calculated to be around 3.99% for the investment
project.
Foreign Exchange Exposure/Risk
The foreign exchange risk is one of the major matter which needs to be considered by the
management of Hatfield Company as the main revenue will be generated in terms of Turkish
Lira and the same would be required to be converted to UK currency for measurement of profit.
The foreign exchange risk is expected to be high as the market is volatile which would also mean
that the management of the company would be facing a risk of incurring losses due to currency
fluctuations (Kundakchyan and Zulfakarova 2014). The management of the company needs to
undertake appropriate steps for the purpose of ensuring that the risks are appropriately managed.
The main concern for the business is the exchange losses which can be minimized if the
management of the company creates a provision of an anticipated amount which would be based
on trends so that losses can be optimized. It is to be noted that the company is looking to expand
the operations in Turkey and therefore the management must accept certain minor losses so that
the overall project can be a success.
The management of the company can also chose an alternative option of making
investment in derivatives so that the comprehensive losses due to currency rate fluctuations can
be managed and the final profit can be protected.
Weighted Average Cost of Capital
The weighted average cost of capital for the company has been determined with the help
of cost of equity and cost of debt of the Hatfield Company that will be financing the investment

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project (Grüninger and Kind 2013). The cost of equity for the company has been in particular
determined for the company with the help of the Capital Asset Pricing Model whereby the
market rate of return for the company has been calculated as per the expected rate of return that
is to be generated in the UK Stock Market Index. The expected amount of market return for the
company is around 8.2% and the beta for the stock was considered to be around 1.6 times.
The cost of debt for the company has been in particular determined with the help of cost of
interest that has been paid by the company and the reported debt value that was shown by the
company for the period in the presented financial statement. The cost of debt that was calculated
for the company was determined to be around 6.00%. The corporation tax rate that has been
charged for getting the post-tax cost of debt was around 35% for the company. The capital
structure of the business of Hatfield reveals that the management utilizes both equity and debt
capital for the purpose of financing the operations of the business (Farooq and Thyagarajan
2014). The overall cost of capital which is computed is for ascertaining the risks which is
associated with the project and also to take decision regarding whether to proceed with the
project considering the return factor (Singh and Bansal 2016). On an overall basis, the overall
cost of capital is shown to be moderately high and the same suggest that the management of the
company needs to formulate strategies to keep the risks associated with the project in check.
Conclusion
The above analysis reveals that the management of Hatfield Company can proceed with
the project of expanding the operations by setting a plant in Turkey. The analysis is done by
considering the results from relevant investment appraisal techniques which are NPV analysis

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and IRR analysis. The results are positive which means that the investment would be profitable
in the long run considering the business is able to manage the risks associated with the capital
structure used by the management and also from the foreign market conditions. In addition to
this, some other external factors might also affect the operations which also needs to be
considered.
Recommendations
The results which are obtained from NPV and IRR analysis clearly shows that the project
would be generating profits in the long run and therefore the management of the company can
invest in the same from long run perspective. The investments can also be made from short run
perspective but the objective would be establish the business in the new market and ensure that
the business is able to cover its costs of operations.

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References
Abdel-Kader, M.G., Dugdale, D. and Taylor, P., 2018. Investment decisions in advanced
manufacturing technology: A fuzzy set theory approach. Routledge.
Baker, M. and Wurgler, J., 2015. Do strict capital requirements raise the cost of capital? Bank
regulation, capital structure, and the low-risk anomaly. American Economic Review, 105(5),
pp.315-20.
Coleman, C., Crosby, N., McAllister, P. and Wyatt, P., 2013. Development appraisal in practice:
some evidence from the planning system. Journal of Property Research, 30(2), pp.144-165.
Farooq, M.S. and Thyagarajan, V., 2014. Valuation of Firm: Methods & Practices-An
Evaluation. International journal of research in business management, India.
Grüninger, M.C. and Kind, A.H., 2013. WACC calculations in practice: Incorrect results due to
inconsistent assumptions-status quo and improvements. Accounting and finance research, 2(2).
Kundakchyan, R.M. and Zulfakarova, L.F., 2014. Current issues of optimal capital structure
based on forecasting financial performance of the company. Life Science Journal, 11(6s),
pp.368-371.
Schlegel, D., Frank, F. and Britzelmaier, B., 2016. Investment decisions and capital budgeting
practices in German manufacturing companies. International Journal of Business and
Globalisation, 16(1), pp.66-78.
Singh, A.K. and Bansal, P., 2016. Impact Of Financial Leverage On Firm’s Performance And
Valuation: A Panel Data Analysis. Indian Journal of Accounting Vol. XLVIII (2), pp.73-80.

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Appendix
1) Cash Flow Analysis

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2) Weighted Average Cost of Capital