Use the second recipe (second picture) to find out the adjusted present value of this project in $. Should the firm accept or reject? Show all the steps you think necessary. (25 points) Subsandwich Inc. is a U.S. company that is considering expanding its operations into Japan. Subsandwich has located a possible site for a Japanese subsidiary in Tokyo. The cost to purchase and equip the facility is ¥765,000,000. Perform an adjusted present value (APV) analysis to determine whether this is a good investment, under the following assumptions: Economic life is 10 years. The terminal value is ¥65 million. The firm will take a straight-line depreciation for these 10 years. Net working capital will average 6% of total sales revenue. The Japanese corporate income tax rate is 37.5%. • The average per-unit sales price will initially be ¥400. First-year sales will be 15 million units, and sales will then grow at 10% per annum for the next 3 years, 5% per annum for the 3 years after that, and then stabilize at 3% per annum afterwards. • First-year variable costs of production will be ¥225 per unit of labor and $1.75 per unit of imported parts. Administrative costs will be ¥300 million. Retail prices, labor costs, and administrative expenses are expected to rise at the Japanese yen rate of inflation, which is forecast to be 1% annually. Dollar prices of imported parts are expected to rise at the U.S. dollar rate of inflation, which is expected to be 4% annually. The yen/dollar exchange rate is currently So(¥/$) = 85. • The yen-denominated unlevered equity discount rate for the project is 13% annually. The firm decides to borrow ¥300 million to finance the project, and the yen-denominated borrowing rate for the project is 6% annually. Another recipe for international decision makers: O Estimate future cash flows in foreign currency. e Estimate the foreign currency discount rate. ® Calculate the foreign currency NPV using the foreign cost of capital. O Translate the foreign currency NPV into dollars using the spot exchange rate

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