Q1: Some MNCs establish a manufacturing facility where there is a relatively low cost of labor, but they sometimes close the facility later because the cost advantage dissipates. Why do you think the relative cost advantage of these countries is reduced over time? (Ignore possible exchange rate effects.)
Q2: DFI Strategy. JCPenney has recognized numerous opportunities to expand in foreign countries and has assessed many foreign markets, including Brazil, Greece, Mexico, Portugal, Singapore, and Thailand. It has opened new stores in Europe, Asia, and Latin America. In each case, the firm was aware that it did not have sufficient understanding of the culture of each country that it had targeted. Consequently, it engaged in joint ventures with local partners who knew the preference of the local customers.
a. What comparative advantage does JCPenney have when establishing a store in a foreign country, relative to an independent variety store?
b. Why might the overall risk of JCPenney decrease or increase as a result of its recent global expansion?
c. JCPenney has been more cautious about entering China. Explain the potential obstacles associated with entering China.
Q3: Huskie Industries, a U.S.based MNC, considers purchasing a small manufacturing company in France that sells products only within France. Huskie has no other existing business in France and no cash flows in euros. Would the proposed acquisition likely be more feasible if the euro is expected to appreciate or depreciate over the long run? Explain.
Q4: When Walt Disney World considered establishing a theme park in France, were the forecasted revenues and costs associated with the French park sufficient to assess the feasibility of this project? Were there any other “relevant cash flows” that deserved to be considered?
Q5: Brower, Inc. just constructed a manufacturing plant in Ghana. The construction cost 9 billion Ghanian cedi. Brower intends to leave the plant open for three years. During the three years of operation, cedi cash flows are expected to be 3 billion cedi, 3 billion cedi, and 2 billion cedi, respectively. Operating cash flows will begin one year from today and are remitted back to the parent at the end of each year. At the end of the third year, Brower expects to sell the plant for 5 billion cedi. Brower has a required rate of return of 17 percent. It currently takes 8,700 cedi to buy one U.S. dollar, and the cedi is expected to depreciate by 5 percent per year.
a. Determine the NPV for this project. Should Brower build the plant?
b. How would your answer change if the value of the cedi was expected to remain unchanged from its current value of 8,700 cedis per U.S. dollar over the course of the three years? Should Brower construct the plant then?