This is due by August 5th. Show all of your calculations. That means you may have to scan and email some of your project. If you would prefer to meet and turn it in, just let me know.
You are a financial analyst at a wine company in Napa Valley. Your CEO thinks it would be a good idea to invest in some vineyard land in the Loire Valley and start producing wine in France too. (There is a different variety of grapes and soil in France, so he thinks that this new wine will sell well in the US and in
Europe.) As such, he also wants to start selling the domestically produced wine in Europe as well.
1) Discuss the pros and cons to the CEO’s plans. Tell him everything he should consider and how he should analyze these project initiatives. (2-3 pages)
2) Explain why the CEO should be concerned with the following:
a. EURUSD exchange rates
b. Inflation rates in the US and France
c. Bank interest rates in the US and France
d. The price wine is currently selling for in France
3) Discuss the pros and cons of the different currency hedging vehicles
(financial alternatives) the company could use to mitigate the risks of doing business in foreign markets and currencies.
The current EURUSD spot rate is 1.33. The inflation rate in the US is 2% while the rate in France is higher at 4%. Assume these inflation rates stay constant through the entire project.
The upfront investment in land, equipment, etc. will be USD $10 Million. There is also an upfront working capital requirement of €500,000. Working capital is then
€25,000 per year. Depreciation is straight line for 10 years.
Salvage value after 10 years is USD $4 Million. The French government, in an effort to help pull the country out of recession, is offering a special tax incentive rate of
25% for 10 years to entice foreign companies to enter the market. The WACC for the project is calculated to be 12%. Do not worry about repatriation taxes.
It is estimated that in years 1 & 2 the company will sell 10,000 bottles per year of the new wine in Europe at a price of €23 per bottle. In years 3-10, they will sell
25,000 bottles of the new wine in Europe at €23 per bottle and 15,000 bottles per year in the US at $33 per bottle (slightly higher than parity price to cover shipping).
They will also sell 10,000 bottles of the domestically produced wine in Europe at a price of €18 per bottle in years 1-10. (Because the domestic wine is already selling in the…