An Italian company is considering expanding the sales of its cappuccino machines to the US market. As a result, the side
Posted: Thu May 19, 2022 7:10 am
An Italian company is considering expanding the sales of its
cappuccino machines to the US market. As a result, the sides of a
setting up a manufacturing facility in the US, should be explored.
The company estimates the initial demand in US will bring in an
annual operating profit of $2,500,000, which is expected to keep
track with the U.S. price level. The new facility will free up the
amount currently exported to the U.S. market. The company presently
realizes an annual operating profit of 1,000,000 Euro on US export,
which keeps track with the price level in Italy.
The manufacturing facility is expected to cost $24 million. The
company plans to finance the project with a combination of debt and
equity capital. The new project will increase the company's
borrowing capacity by 10M Euro, and the company plans to borrow
only that amount. The city in which the facility will be built has
promised to provide a 5-year loan of $7.5 million at 6% per
annum.
The U.S. IRS allows the company to straight-line depreciate the
new facility over a 5-year period. After that time, the company
plans to terminate the project and sell all molding equipment,
which accounts for 50% of the project cost. The company estimates
that the after tax salvage value of molding equipment will be no
more than 25% of its original book value.
Corporate tax rates in the US and Italy are the same as 35%. The
long-term inflation rate is expected to be 3% in the US, and 5% in
Italy. The current spot exchange rate is $1.5/Euro. The Italian
company explicitly believes in PPP as the best means to forecast
future exchange rate.
The company's US. Sales affiliate currently holds $1.5 million
ready for repatriation back to Italy The money was accumulated
under a special tax concession rate of 25% If the fund were
repatriated, additional tax will be due.
The company's weighted average cost of capital is 11%, cost of
dollar borrowing us 9%, cost of Euro borrowing is 10%, and cost of
equity is 18%. The all-equity Euro cost of capital is 15%.
cappuccino machines to the US market. As a result, the sides of a
setting up a manufacturing facility in the US, should be explored.
The company estimates the initial demand in US will bring in an
annual operating profit of $2,500,000, which is expected to keep
track with the U.S. price level. The new facility will free up the
amount currently exported to the U.S. market. The company presently
realizes an annual operating profit of 1,000,000 Euro on US export,
which keeps track with the price level in Italy.
The manufacturing facility is expected to cost $24 million. The
company plans to finance the project with a combination of debt and
equity capital. The new project will increase the company's
borrowing capacity by 10M Euro, and the company plans to borrow
only that amount. The city in which the facility will be built has
promised to provide a 5-year loan of $7.5 million at 6% per
annum.
The U.S. IRS allows the company to straight-line depreciate the
new facility over a 5-year period. After that time, the company
plans to terminate the project and sell all molding equipment,
which accounts for 50% of the project cost. The company estimates
that the after tax salvage value of molding equipment will be no
more than 25% of its original book value.
Corporate tax rates in the US and Italy are the same as 35%. The
long-term inflation rate is expected to be 3% in the US, and 5% in
Italy. The current spot exchange rate is $1.5/Euro. The Italian
company explicitly believes in PPP as the best means to forecast
future exchange rate.
The company's US. Sales affiliate currently holds $1.5 million
ready for repatriation back to Italy The money was accumulated
under a special tax concession rate of 25% If the fund were
repatriated, additional tax will be due.
The company's weighted average cost of capital is 11%, cost of
dollar borrowing us 9%, cost of Euro borrowing is 10%, and cost of
equity is 18%. The all-equity Euro cost of capital is 15%.