Preview

Case Study on Dorchester Ltd.

Satisfactory Essays
Open Document
Open Document
986 Words
Grammar
Grammar
Plagiarism
Plagiarism
Writing
Writing
Score
Score
Case Study on Dorchester Ltd.
Suggested Solution to Dorchester Ltd.

Summary of Key Information

The current exchange rate in European terms is So(£/$) = 1/1.50 = .6667.
The initial cost of the project in British pounds is SoCo = £0.6667($7,000,000) =
£4,666,900.
The U.K. inflation rate is estimated at 4.5% per annum, or the mid-point of the 4%-5% range. The U.S. inflation rate is forecast at 3% per annum. Under the simplifying assumption that PPP holds [pic] = .6667(1.045)t/(1.03)t.
The before-tax nominal contribution margin per unit at t=1 is $4.40(1.03)t-1.
It is assumed that Dorchester will be able to sell one-fifth of the 290,000 pounds of candy it presently sells to North America in Eastern Europe the first year the new manufacturing facility is in operation; two-fifths the second year; etc.; and all 290,000 pounds beginning the fifth year.
The contribution margin on lost sales per pound in year t equals £3.00(1.045)t.
Terminal value will initially be assumed to equal zero.
Straight line depreciation over the seven year economic life of the project is assumed: Dt = $1,000,000 = $7,000,000/7 years.
The marginal tax rate, (, is the U.K. (or U.S.) rate of 35%.
Dorchester will borrow $1,500,000 at the concessionary loan rate of 7.75% per annum. Optimally, Dorchester should borrow the remaining funds it needs, £1,000,000, in pounds sterling because according to the Fisher equation, the real rate is less for borrowing pounds sterling than it is for borrowing dollars:
5.98% or .0598 = (1.1075)/(1.045) - 1.0 versus
6.31% or .0631 = (1.095)/(1.03) - 1.0.
Kud = 15%.
Calculation of the Present Value of the After-Tax Operating Cash Flows
| | | | | | | | |
| | | |[pic] x Quantity | | | | |
| | | | |

You May Also Find These Documents Helpful

  • Good Essays

    Course Projectb Acct. 505

    • 636 Words
    • 3 Pages

    Part 1 Cash flows over the life of the project Item Annual cash savings Tax savings due to depreciation Total annual cash flow Before Tax Amount $72,540 32,000 Tax Effect After Tax Amount 0.65 $47,151 0.35 $11,200 $58,351…

    • 636 Words
    • 3 Pages
    Good Essays
  • Satisfactory Essays

    Acg 320

    • 496 Words
    • 2 Pages

    Using straight line deprecation of 1 year means that 22,500 (1*22,500) has been added to the accumulated deprecation. The cost of the assets $100,000 minus $22,500, equal the book value at the end of December 31, 2005, of $77,500.…

    • 496 Words
    • 2 Pages
    Satisfactory Essays
  • Good Essays

    Buffet’s criteria for investments is important to the success of Berkshire Hathaway because Buffet’s five principles were the set of responses and patterns that Berkshire used to obtain their success. Buffet’s investment strategy, which consisted of five principles, can easily be observed throughout Berkshire Hathaway’s decision-making process. Buffet’s ability to evaluate a business while ignoring trends, making niche investments, and requiring key managers to be substantial stakeholders is the criteria that Berkshire Hathaway uses in their planning.…

    • 267 Words
    • 2 Pages
    Good Essays
  • Powerful Essays

    * Category managers worked with store managers to review the previous year’s lineup, order and actual sales…

    • 1412 Words
    • 6 Pages
    Powerful Essays
  • Better Essays

    Macys vs Nordstroms

    • 2857 Words
    • 12 Pages

    c. Depreciation of owned properties is provided primarily on a straight-line basis over the estimated asset lives, which range from fifteen to fifty years for buildings and building equipment and three to fifteen years for fixtures and equipment. F-10, 10-K…

    • 2857 Words
    • 12 Pages
    Better Essays
  • Satisfactory Essays

    2. Wendy rebuilt her equipment with an original cost of $14,000 (no salvage expected) at the end of the third year of a seven year estimated life. Sally uses the straight-line depreciation method. The rebuilding cost $1,600 and changes estimated salvage to $1,000 (no change in life). What is the depreciation in year 4?…

    • 2219 Words
    • 16 Pages
    Satisfactory Essays
  • Satisfactory Essays

    Ac 505: Case Study Two

    • 378 Words
    • 2 Pages

    Break even point in number of passenger cars per month (New fare and Average load factor)…

    • 378 Words
    • 2 Pages
    Satisfactory Essays
  • Satisfactory Essays

    Jones Blair Case

    • 346 Words
    • 2 Pages

    Question: 1. What share does Jones Blair have of the rural household market segment? Rural professional market?…

    • 346 Words
    • 2 Pages
    Satisfactory Essays
  • Satisfactory Essays

    MD Widgets manufactures three different product lines, Model X, Model Y, and Model Z. Considerable market demand exists for all models. The following per unit data apply:…

    • 379 Words
    • 2 Pages
    Satisfactory Essays
  • Powerful Essays

    Peter Nicholson wishes to convert the factory in the north east to production of the electric taxi. Using data in Appendix C, Table 1, calculate payback period and the average rate of return.…

    • 3124 Words
    • 8 Pages
    Powerful Essays
  • Good Essays

    Math

    • 3845 Words
    • 16 Pages

    Solution. The rate of depreciation after t years is the derivative of R with respect to t :…

    • 3845 Words
    • 16 Pages
    Good Essays
  • Good Essays

    We assume that cost of debt equals 11.25% as Dixon issue bonds at this rate for the purpose of this project financing.…

    • 1892 Words
    • 8 Pages
    Good Essays
  • Satisfactory Essays

    Vershire Company was a diversified packaging company with several major divisions. In their organization chart, reporting to the divisional general manager were two line managers, vice president in charge of manufacturing and marketing division. These vice presidents headed all division’s activities in their respective functional area.…

    • 427 Words
    • 2 Pages
    Satisfactory Essays
  • Better Essays

    Baker is enlisted by commissioning executive Ryan and Keen to do an impossible job, both time and resource wise. Following an initial insight from Acton, the company’s chairman, Baker takes the lead to a newly created, cross functional task force. The idea is cascaded from top to down to him, across two layers of hierarchy. Very little is as well said about Acton’ and Herd’ ideas, except that they ‘feel’ that forecasting is an issue following significant loses in Q1 1975.…

    • 2887 Words
    • 12 Pages
    Better Essays