Finance for International Business (7BSP1245): HMS Project Report

This report provides a comprehensive financial analysis of a project proposed by Hatfield Manufacturing Systems plc (HMS), specifically evaluating the potential investment in a new manufacturing plant in Turkey. The analysis includes a detailed calculation of cash flows, internal rate of return (IRR), and net present value (NPV) to determine the project's viability. It examines the effects of foreign exchange rates, considering both transaction, translation, and economic exposures, and suggests strategies for mitigating related risks. The report also discusses the financing of the project, advocating for debt financing due to its lower cost compared to equity, and assesses the value the project adds to the company. Furthermore, the report considers other relevant factors such as Turkey's economic environment, including its growing young population, unemployment rates, and GDP growth. The analysis concludes that the project is viable, provided the exchange rate remains favorable, and recommends its acceptance based on the calculated IRR and NPV.

FINANCE FOR INTERNATIONAL BUSINESS
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FINANCE FOR INTERNATIONAL
BUSINESS
Assignment Title: Hatfield Manufacturing Systems plc

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Contents
Analysis of the project undertaken:............................................................................................3
Viability of the project:..............................................................................................................5
Effects of the foreign exchange:................................................................................................6
Addition of value to the company:.............................................................................................7
Financing of the project:............................................................................................................7
Other considerations:.................................................................................................................8
References..................................................................................................................................9

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Analysis of the project undertaken:
The purpose of this assignment is assessment of the project to be undertaken by Hatfield
Manufacturing Systems plc.
The following table shows the relevant calculation:
(Amounts in TLk)
Particulars
202
0
202
1
202
2
202
3
202
4
202
5
202
6
202
7
202
8
202
9
Cash
outflows:
Initial
investment
9500
0
Machinery
1500
0
Total cash
outflows
-
1100
00
Cash
inflows:
Sales
15,
518.
00
17,
380.
16
19,
465.
78
21,
801.
67
24,
417.
87
27,
348.
02
30,
629.
78
34,
305.
35
38,
422.
00
43,
032.
64

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Less: variable
costs:
Labour costs
513.
45
523.
72
534.
19
544.
88
555.
77
566.
89
578.
23
589.
79
601.
59
613.
62
Other costs
953.
55
967.
85
982.
37
997.
11
1,
012.
06
1,
027.
24
1,
042.
65
1,
058.
29
1,
074.
17
1,
090.
28
Gross profit
14,
051.
00
15,
888.
59
17,
949.
21
20,
259.
69
22,
850.
04
25,
753.
88
29,
008.
90
32,
657.
27
36,
746.
24
41,
328.
74
Less: fixed
costs
1,
144.
00
1,
155.
44
1,
166.
99
1,
178.
66
1,
190.
45
1,
202.
36
1,
214.
38
1,
226.
52
1,
238.
79
1,
251.
18
Less:
depreciation
11,
000.
00
11,
000.
00
11,
000.
00
11,
000.
00
11,
000.
00
11,
000.
00
11,
000.
00
11,
000.
00
11,
000.
00
11,
000.
00
Earnings
before taxes
1,
907.
00
3,
733.
15
5,
782.
22
8,
081.
02
10,
659.
58
13,
551.
53
16,
794.
52
20,
430.
75
24,
507.
45
29,
077.
56
Less: Taxes
@10%
190.
70
373.
31
578.
22
808.
10
1,
065.
96
1,
355.
15
1,
679.
45
2,
043.
07
2,
450.
75
2,
907.
76
Earnings
after taxes
1,
716.
3,
359.
5,
204.
7,
272.
9,
593.
12,
196.
15,
115.
18,
387.
22,
056.
26,
169.

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30 83 00 92 63 38 07 67 71 80
Total cash
inflows
12,
716.
30
14,
359.
83
16,
204.
00
18,
272.
92
20,
593.
63
23,
196.
38
26,
115.
07
29,
387.
67
33,
056.
71
37,
169.
80
Net cash
flows
-
1100
00
12,
716.
30
14,
359.
83
16,
204.
00
18,
272.
92
20,
593.
63
23,
196.
38
26,
115.
07
29,
387.
67
33,
056.
71
37,
169.
80
IRR
13.2
6%
Effects of
exchange
rates
8.82
57
8.82
57
8.82
57
8.82
57
8.82
57
8.82
57
8.82
57
8.82
57
8.82
57
8.82
57
8.82
57
Net Cash
flows in UK
Pound/k
-
12,4
63.6
0
1,
440.
83
1,
627.
05
1,
836.
00
2,
070.
42
2,
333.
37
2,
628.
28
2,
958.
98
3,
329.
78
3,
745.
51
4,
211.
54
IRR
13.2
6%

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Data used:
Sales in the first year of operation (2020) are forecast to be TL15,518k and are expected to
grow at 12% per year thereafter. Variable production cost will be TL1,467k in 2020 of which
35% will be labour cost. Labour costs are forecast to increase by 2% per year and other
variable costs by 1.5% per year. The project also has fixed costs of TL1,144 which will
increase at 1% per year.
a The project is expected to generate return of 13.26%
b
There are benefits in adopting foreign country perspective in terms of lower
tax rate and labour cost. However, there is also a risk of high inflation and
depreciation of currency
c
Yes, the project is expected to add value to HMS plc provided exchange
rate
d Depreciation in TL vis-à-vis Pound will reduce the IRR and vice-a-versa
e Financing of the Project
Cost of Debt
Coupon
6
%
Face Value
10
0
Market Price
10
1.
63
Tax Rate of UK
19
%
Cost of Debt 4.

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78
%
Debt is a cheap source of finance as compared to equity, hence HMS should
consider financing the project only through Debt to reduce the risk or
uncertainty of inflation and exchange fluctuations
Yes, the project seems viable since the viability of the project can only be ascertained by the
way of calculating the excess of the cash inflows over the cash outflows. From this
perspective, it seems that the project is viable enough and should be accepted by the
company.
The internal rate of return is something which is used in the capital budgeting when it comes
to estimating the profitability of the potential investments. This is the discount rate which
makes the net present value of the cash flows from any particular project to 0. This does the
same thing as net present value.
The higher this return on a project, the more the investment is viable for the company. This
rate would be used for the purposes of ranking all of the prospective projects on an even
basis.
Also, the internal rate of return should be calculated which shows the rate of return that the
company would give out to the investors or to the company. If this rate is more, only then
should the project be accepted, otherwise should be rejected.
In the given case, the internal rate of return comes out to be 13.26% and hence, the project
should be accepted.

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Under both of the points, net present value and the internal rate of return, the project seems
viable and hence, the same should be accepted.
Viability of the project:
The net present value is defined as the value of all of the future cash flows, both negative and
positive over the life of the project or the investment which is discounted at the appropriate
rate. This is the analysis of the form of the intrinsic valuation and is used for the purposes of
ascertaining the finance and the accounting so as to determine the value of the business, the
amount of the investments security, capital project, new venture, the program of cost
reduction and any flow of cash which includes the cash flow.
This concept is used for the purposes of determining the amount of investment in the project
is any amount of cash flows. It takes into account all of the revenues, expenses, capital costs
that are connected with the investment in the free cash flows. The timing of each of the
account of the cash flows considering all of the revenues and the costs which would result in
the determination of the present value of the investment would be factored in (uonbi, 2019).
The cash flows are discounted for the purposes of adjusting them for the risk involved in the
investment opportunity and to account for the time value of money (Corporate finance,
2019).
The cash inflows are discounted to adjust for the risks since not each investment has the same
level of risk. This could be illustrated from the fact that if an investor invests in a US treasury
bill, then there is a much more chance of receiving a cash flows from it instead of investing in
a small company which is just starting up the business. In order to account for the risk, the
discount rate taken as higher than the investment that are more risky in nature for the
investment. This would help in considering the risk free rate of return along with all of the

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other investments that are measured by how much risk the company or an investor is willing
to rake for the stated investment.
Also, the cash flows have to be adjusted on the basis of the time value of money which is
required due to inflation, interest rates and the opportunity costs which would make the
money more valuable as soon as the same is received (Lumen learning, 2019).
Effects of the foreign exchange:
The companies are exposed to the following types of the risks which would have the current
volatility:
Transaction exposure: this is the sort of the exposure which arises from the
fluctuations that takes place in the obligations of the company to make and to receive
the payments which are denominated in the foreign currency. This is the type of an
exposure which ranges from the short term to the medium term in nature.
Translation exposure: this is the sort of an exposure which arises from the
fluctuations that takes place in the consolidated financial statements of the company
especially when the same has foreign subsidiaries. This is the type of an exposure
which ranges from the short term to the medium term in nature.
Economic or the operating exposure: this is a lesser known wort of the exposure
which is caused by the effect of an unexpected fluctuations in the currency on the
cash flows of the company and the market value which is of long term in nature. The
effect of the same could be major as expected which could affect the competitive
position of the company even when the same operates or sells overseas.
This economic exposure is concerned with the unexpected changes in the exchange rates
which is not possible when it comes to prediction since the management has either budgets or
the forecasts on some of the assumptions which shows the excepted changes in the currency

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rates. The transaction and the translation exposure could be estimated and therefore the same
could be hedged from which the economic exposure is somewhat very difficult when it
comes to being estimated.
The company could undertake the following operational strategies for the purposes of
mitigating the risks:
Diversifying the production facilities and the markets that exist for the products.
There must be some alternative sources of key inputs that makes some strategic sense
when the exchange rate moves from one region to another
The finances could also be diversified by the way of accessing the capital market
which exists in the nations (Christian, 2018).
The following are the current risk mitigation strategies that could be done:
The foreign currency inflows and outflows should be matched up
There must be a contractual agreement in which the parties involved could share the
risk which arises from the fluctuation in the exchange rate.
Credit swap could be undertaken in which the arrangement between the two
companies could be located in the different countries so that the company could
borrow for a defined period after which the funds that have been borrowed could be
repaid.
Currency swap: this is the most popular strategy which is much like the back to back
loan that does not appear on the balance sheet. In this, the companies involved borrow
money in the markets and the currencies get the best rates and then the proceeds are
swapped Parlak, 2016).

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There are many benefits when it comes to the adopting of the of the operations in the foreign
country since that would mean lower labour costs being incurred by the company and also,
lower taxes being paid by the company. This would mean more profits available with the
company for distribution as profits.
Addition of value to the company:
When the project in which the company has been investing its hard earned money results in a
present inflow of cash, then it means that that project shall add value to it and hence, more
this amount is, the better it is for the money. The stated project would add value to the
company and hence, the stated project should be accepted. This is mainly due to the fact that
the present project shall add Tlk 13718.15 to the value of the company (FESTUS, 2013).
Financing of the project:
The following table shows the relevant assumptions:
Financing of the Project
Cost of Debt
Coupon 6%
Face Value 100
Market Price
101.6
3
Tax Rate of UK 19%
Cost of Debt
4.78
%
Debt is a cheap source of finance as compared to equity, hence HMS should
consider financing the project only through Debt to reduce the risk or
uncertainty of inflation and exchange fluctuations

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From the above calculations, it can be stated that debt is a cheap source when compared with
the equity. Hence, the company must consider the financing the project when being compared
with the equity which would go on to reduce the risk or the uncertainty of inflation and the
exchange fluctuations.
Other considerations:
Turkey also has a large and growing young population which is well educated. The
unemployment rate in Turkey is currently 9.7%. However, the non-agriculture rate is 11.4%
and amongst young people the rate is 16.9%. The HMS Board view is that this should give
scope to recruit, train and retain staff without wage costs getting out of control. The Turkish
economy is experiencing good growth with GDP growing by 7.3% in 2017 led by
government investment in infrastructure and is on track for 5.5% growth in 2018.
The case study reports the above stated information. Now, that perspective, it would be better
to invest or to open the plant in Turkey since that would mean that the unemployment rate
would go down. If the company concentrates in providing employment to the unemployment
people, then it would be considered to be scally viable and more and more investors would
invest into the company which would make to even more viable project for the purposes of
making the investment. The country has about 16.9% of the young who may not be skilled
but since they are young minds, they would be open to risky employment opportunities and
with proper training, they could be prove to be assets for the company and for their country.
This would lead to an addition in the GDP of the country as well. Hence, investment in
Turkey should be made.

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References:
Christian, O. (2018). Effect of Exchange Rate Fluctuation on Firm Profitability: Evidence
from Selected Quoted Conglomerates in Nigeria. [online] Hrmars.com. Available at:
http://hrmars.com/hrmars_papers/Effect_of_Exchange_Rate_Fluctuation_on_Firm_Profi
tability_Evidence_from_Selected_Quoted_Conglomerates_in_Nigeria.pdf [Accessed 14
Dec. 2019].
chss.uonbi.ac.ke. (2019). NPV. [online] Available at:
https://chss.uonbi.ac.ke/sites/default/files/chss/Relationship%20between%20Foreign
%20Exchnage%20Risk%20and%20profitability.pdf [Accessed 14 Dec. 2019].
Corporate Finance Institute. (2019). Net Present Value (NPV) - Definition, Examples, How to
do NPV Analysis. [online] Available at:
https://corporatefinanceinstitute.com/resources/knowledge/valuation/net-present-value-
npv/ [Accessed 14 Dec. 2019].
Courses.lumenlearning.com. (2019). Net Present Value | Boundless Finance. [online]
Available at: https://courses.lumenlearning.com/boundless-finance/chapter/net-present-
value/ [Accessed 14 Dec. 2019].
FESTUS, E. (2013). THE EFFECTS OF OPERATING FOREIGN EXCHANGE EXPOSURE
ON SHARE PRICES IN COMMERCIAL AND SERVICES FIRMS AT THE NAIROBI
SECURITIES EXCHANGE. [online] Pdfs.semanticscholar.org. Available at:
https://pdfs.semanticscholar.org/b0ed/88877041c300e836f04328791147037da9b7.pdf
[Accessed 14 Dec. 2019].

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Parlak, D. (2016). FOREIGN EXCHANGE RISK AND FINANCIAL PERFORMANCE: THE
CASE OF TURKEY. [online] Dergipark.org.tr. Available at:
https://dergipark.org.tr/en/download/article-file/287901 [Accessed 14 Dec. 2019].