It involves the analysis of distinction between domestic, as well as offshore investments. The process incorporates risk assessment into the estimates of project cash flows. It separates the potential political risk with adjustments that would arise due to fluctuations in the exchange rate. This was done because political risks are often entirely separated from risk arising from exchange activities. Evaluation of parity conditions over the life of the project was carried out. This was however, made beneficial by incorporating the conditions into the forecasts of exchange rates. The forecasts were readily available as they were within the contact of managers. The case was expanded by including annual exchange relationships, as well as potential political events that indicated relations with exchange rate behavior. Although the process may seem to distract students, the simplifications utilized were essential for the provision of a sufficiently detailed analysis. The process also included a keen focus on the beneficial techniques, as well as financial aspects included in the case. Some issues were however over looked although an individual who reviews the analysis would easily reincorporate them. Political contemplations principal to investments were also initiated in the process. This was to help meet the requirements of a vast customer. Introduction Capital budgeting is the main subject matter of this case in regards to a multinational organization. Rudimentary comprehension of basic techniques in capital budgeting is essential in evaluation of the case (Bierman, Harold & Smidt, p. 382). However, some issues require advanced knowledge to analyze and the present resolution of the case. Automotive Specialties, Incorporated (ASI) is a multinational holding company classified as a domestic division. It has been delegated the role of building a new plant in Mesa Verde, a small country in South America by its largest customer. Jamie Miles an Assistant treasurer at ASI did the analysis and forecasts of the customer’s proposal. Uncertainty of the investment was done in collaboration with Fujimora Transport though the investment value was not determined. The management of ASI needed to consider some of the customer’s motives prior to commitment of finances in the implementation of the project. Theories, concepts, and principles This case indicates the fact that capital budgeting involving multinational organization is similar to the basic capital budgeting that students are familiar with. Development of annual income projection was done using the provided estimates of demand and supply. This concept was useful in determining the strength of royale against the dollar over the entire life of the project. Estimates of cost of goods sold were developed covering every SKU, operating expenses, as well as depreciation cost for the Mesa Verde project for every next six years. The straight line method of depreciation was used in accordance to the initial investment amount. A discounted cash flow analysis was conducted according to the budgeted figures obtained from previous calculations. This included the estimates of the projects net present value, as well as internal rate of return. Included also was the original royale rate of exchange scenario for the annual cash flow values (Bierman, Harold & Smidt, p. 382). A going concern method is used in the sale of the project in the final year. This included the
AUTOMOTIVE SPECIALTIES, INCORPORATED Name: Professor: Course: Date: Table of Contents i. Process utilized in solutions and recommendations ii. Introduction iii. Theories, concepts, and principles iv. Problems in the case v. Consequence of persistent problems vi…
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