Build A Factory In The United States Costs 55M Per Year

Build A Factory In The United States Cost 55mfor Year

Question 1. BUILD A FACTORY IN THE UNITED STATES: COST, €55M. CCR is considering building a new factory in the US, which involves a €55 million investment. The project entails evaluating the financial viability of establishing a manufacturing plant in the US, including analysis of cash flows, risks, and strategic considerations. The decision involves understanding the impact on existing operations, costs, revenues, and potential market benefits while considering budget constraints and alternative projects.

Paper For Above instruction

The decision to construct a new manufacturing facility in the United States presents a complex interplay of financial, strategic, and operational considerations. A comprehensive analysis requires evaluating whether the investment's potential benefits outweigh its costs and risks, including its impact on existing operations and alignment with corporate strategy.

1. Financial Evaluation of the US Factory Project

The core of project analysis involves calculating its net present value (NPV) and internal rate of return (IRR). The project entails a €55 million investment, with expected cash flows over multiple years and an associated weighted average cost of capital (WACC) of 10%, reflective of its high-risk profile. The NPV calculation involves discounting the expected cash inflows and outflows at this rate, providing a measure of profitability relative to the initial investment.

The cash flows should incorporate the initial outlay, annual operational cash flows, and terminal cash flows if applicable. Given the high-risk nature and the €55 million upfront cost, even modest positive NPVs would indicate appeal for the project if uncap constrained.

2. Impact of the US Plant on the French Operations

A key factor impacting the project's cash flows is the estimated 11.5% annual decline in output and cash flows for the French plant, starting from Year 4. This decrease stems from market cannibalization, market saturation, or capacity reallocation. Critically, such reductions must be incorporated into the analysis to accurately assess the project viability.

By adjusting the French plant's cash flows to reflect this decline from Year 4 onward, the analysis accounts for the opportunity cost of the US investment. This adjustment often reduces the overall corporate valuation, as the loss in French revenues must be offset by the US project’s gains.

3. Consideration of Strategic and Non-Financial Factors

Beyond pure financial metrics, strategic considerations include market expansion, branding, operational efficiencies, and sustainability. The potential for green architecture and production methods can enhance the firm's environmental reputation, possibly translating into long-term brand loyalty and market differentiation.

Consumer perception is also vital: products made domestically in the US could enhance brand appeal within the American market, fostering customer loyalty. Conversely, cultural barriers, workforce skill levels, and supply chain logistics must be assessed to determine operational feasibility and risks.

4. Budget Constraints and Alternatives

Given that CCR has a limited capital budget of €75 million, project prioritization becomes essential. The analysis involves ranking projects based on their NPVs and IRRs, ensuring the most value-creating projects are selected within the financial constraints. While the US project costs €55 million, other projects, such as capacity expansion in Brittany or new product lines, may compete for funding.

If the land sale proceeds are not reinvested into other projects, the net cash inflow from land sale in Year 10 should be included in the analysis as a terminal cash flow.

5. Application of Financial Metrics and Project Selection

To compute the NPV:

- Discount all expected cash flows to present using the 10% WACC.

- Subtract the initial €55 million investment.

- Adjust cash flows from Year 4 onward to reflect the decline in French cash flows.

The IRR calculation finds the discount rate that sets NPV to zero, providing another decision metric. Projects with positive NPVs and IRRs exceeding the WACC are considered financially viable.

Given all these factors, if there were no budget restrictions, projects with the highest NPVs and IRRs would be recommended first. However, with a €75 million cap, prioritization requires comparing the NPVs of the US project against other alternatives.

6. Conclusions and Recommendations

The analysis indicates that the US factory could be financially viable if its NPV is positive after accounting for the decline in French operations. For maximum shareholder value, CCR should prioritize projects offering the highest returns, considering both financial metrics and strategic alignment. The US project might be worth pursuing if it ranks highly in NPV and IRR calculations, and if it fits within the capital constraints.

In summary, a thorough quantitative assessment, blended with strategic considerations about market positioning and operational risks, guides the optimal investment decision. Proper adjustment for the decline in French cash flows and inclusion of land sale proceeds are crucial to accurate valuation, ensuring CCR makes informed and balanced capital allocation choices.

References

• Brealey, R. A., Myers, S. C., & Allen, F. (2017). Principles of Corporate Finance (12th ed.). McGraw-Hill Education.
• Damodaran, A. (2010). Applied Corporate Finance (3rd ed.). Wiley.
• Gitman, L. J., & Zutter, C. J. (2015). Principles of Managerial Finance (14th ed.). Pearson.
• Frank, M. Z., & Goyal, V. K. (2008). Capital Budgeting and Performance. Journal of Financial Economics, 88(1), 1-21.
• Ross, S. A., Westerfield, R. W., & Jaffe, J. (2013). Corporate Finance (10th ed.). McGraw-Hill.
• Petersen, M. A., & Rajan, R. G. (2002). Does Distance Still Matter? The Geography of Investment Advisors. Journal of Finance, 57(3), 1039-1073.
• Higgins, R. C. (2012). Analysis for Financial Management (10th ed.). McGraw-Hill/Irwin.
• Damodaran, A. (2012). Investment Valuation: Tools and Techniques for Determining the Value of Any Asset (3rd ed.). Wiley.
• Berk, J., & DeMarzo, P. (2017). Corporate Finance (4th ed.). Pearson.
• Lev, B. (2001). Intangibles: Management, Measurement, and Reporting. Brookings Institution Press.