International EV Corporation (IEC-Canada), a Canadian multinational enterprise, is trying to decide whether to establish a electronic engine manufacturing plant in the U.K. (IEC-UK). IEC-Canada expects to significantly boost its European sales of small electronic engines (40-160hp) from the 20,000 it is currently exporting there. As an inducement to locate in the vacant plant and thereby ease unemployment among autoworkers in Manchester, the U.K. National Enterprise Board (NEB) will provide a 5-year loan of L5 million (or C$10 million at the current spot rate of C$2/L) at 0% interest rate with the principal to be repaid in a lump sum at the end of the fifth year. The total acquisition, equipment, and retooling costs for this plant are estimated to equal C$50 million. This will be depreciated on a straight-line basis over a 5-year period, with zero salvage value. Of the C$50 million in net plant and equipment costs, C$10 million will be financed by NEB's interest-free loan of L5 million (see above). The remaining C$40 million will be supplied by the parent in the form of equity capital. Working capital requirements - comprising cash, accounts receivable, and inventory - are estimated at 30% of sales, but this amount will be partially offset by accounts payable to local firms, which are expected to average 10% of sales. Therefore, net investment in working capital will equal approximately 20% of sales. The following table presents the expected annual units produced, the price per unit (pound, L), the variable cost per unit (L), and the exchange rate (C$ per unit of pound, L) over the 5-year period: The following table presents the expected annual units produced, the price per unit (pound, L), the variable cost per unit (L), and the exchange rate (C$ per unit of pound, L) over the 5-year period: Year 0 2 3 4 5 Units 30,000 66,000 73,000 80,000 88,000 Price () 250 278 308 342 380 140 147 154 162 170 Variable cost per unit () 2.0000 1,96 1.92 1.89 1.85 1.82 Exchange rate (S/E) In addition to depreciation and variable cost, IEC-UK will be charged by the parent the license fees and royalties annually, set at 7% of annual sales revenue. The overhead expenses assigned from the parent are estimated to be L600,000, L1.2 million, L1.3 million, L1.4 million, and L1.5 million for the 5-year period. The effective tax rate on corporate income faced by IEC-UK in England is estimated to be 40%, however, no tax will be levied on loss and loss can be applied against income in the following years, reducing corporate taxes owed in the following years. IEC-UK is projected to pay dividends equal to 100% of its remaining net cash flows after making all necessary loan repayments. At the end of the 5-year period, IEC- Canada is expected to sell IEC-UK to a local investor and receive L19 million after repaying the loan and paying all taxes and fees. Approximately 30% of the total amount of materials used in the IEC-UK manufacturing process comes from IEC-Canada. The remaining components will be purchased locally. Costs of both sources of materials have been included in the above variable cost estimates for the project. IEC-Canada's annual net cash flows from exporting its materials to IEC-UK are C$300,000, C$700,000, C$800,000, C$900,000, and C$1 million for the 5-year period. Required: a) Identify relevant cash flows for this project under the two views and calculate NPV @20% and IRR for both views. Is this project acceptable to IEC-Canada? Briefly discuss your rationale. b) What are the qualitative risks in a foreign project? Does any of these risks appear to exist in this project? International EV Corporation (IEC-Canada), a Canadian multinational enterprise, is trying to decide whether to establish a electronic engine manufacturing plant in the U.K. (IEC-UK). IEC-Canada expects to significantly boost its European sales of small electronic engines (40-160hp) from the 20,000 it is currently exporting there. As an inducement to locate in the vacant plant and thereby ease unemployment among autoworkers in Manchester, the U.K. National Enterprise Board (NEB) will provide a 5-year loan of L5 million (or C$10 million at the current spot rate of C$2/L) at 0% interest rate with the principal to be repaid in a lump sum at the end of the fifth year. The total acquisition, equipment, and retooling costs for this plant are estimated to equal C$50 million. This will be depreciated on a straight-line basis over a 5-year period, with zero salvage value. Of the C$50 million in net plant and equipment costs, C$10 million will be financed by NEB's interest-free loan of L5 million (see above). The remaining C$40 million will be supplied by the parent in the form of equity capital. Working capital requirements - comprising cash, accounts receivable, and inventory - are estimated at 30% of sales, but this amount will be partially offset by accounts payable to local firms, which are expected to average 10% of sales. Therefore, net investment in working capital will equal approximately 20% of sales. The following table presents the expected annual units produced, the price per unit (pound, L), the variable cost per unit (L), and the exchange rate (C$ per unit of pound, L) over the 5-year period: The following table presents the expected annual units produced, the price per unit (pound, L), the variable cost per unit (L), and the exchange rate (C$ per unit of pound, L) over the 5-year period: Year 0 2 3 4 5 Units 30,000 66,000 73,000 80,000 88,000 Price () 250 278 308 342 380 140 147 154 162 170 Variable cost per unit () 2.0000 1,96 1.92 1.89 1.85 1.82 Exchange rate (S/E) In addition to depreciation and variable cost, IEC-UK will be charged by the parent the license fees and royalties annually, set at 7% of annual sales revenue. The overhead expenses assigned from the parent are estimated to be L600,000, L1.2 million, L1.3 million, L1.4 million, and L1.5 million for the 5-year period. The effective tax rate on corporate income faced by IEC-UK in England is estimated to be 40%, however, no tax will be levied on loss and loss can be applied against income in the following years, reducing corporate taxes owed in the following years. IEC-UK is projected to pay dividends equal to 100% of its remaining net cash flows after making all necessary loan repayments. At the end of the 5-year period, IEC- Canada is expected to sell IEC-UK to a local investor and receive L19 million after repaying the loan and paying all taxes and fees. Approximately 30% of the total amount of materials used in the IEC-UK manufacturing process comes from IEC-Canada. The remaining components will be purchased locally. Costs of both sources of materials have been included in the above variable cost estimates for the project. IEC-Canada's annual net cash flows from exporting its materials to IEC-UK are C$300,000, C$700,000, C$800,000, C$900,000, and C$1 million for the 5-year period. Required: a) Identify relevant cash flows for this project under the two views and calculate NPV @20% and IRR for both views. Is this project acceptable to IEC-Canada? Briefly discuss your rationale. b) What are the qualitative risks in a foreign project? Does any of these risks appear to exist in this project