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The purchasing department has found an excellent global positioning system circuit card in Germany that can provide your firm with a competitive advantage in the marketplace. Delivery of the circuit cards is 6 months from date of order. The German firm has offered your firm a 2.5% discount on the €3.5 million purchase if paid up front at the time of order; otherwise, the full €3.5 million will be payable in 6 months before delivery, providing that inflation in Germany does not exceed 1.0% for the year. If inflation exceeds 1.0% for the year, the rate of inflation would be added to the €3.5 million. Find out how inflation has been affected after the European Union trade agreement and introduction of the euro. Is inflation likely to increase? Why or why not?
Your supervisor has asked for a recommendation on how Navigation Systems, Inc. should handle the payment and the probable cost of each scenario. You know that your firm's weighted average cost of capital is 9%. Assume that a going concern business will, at a minimum, recover the WACC to achieve at least a breakeven financial position. Therefore, any capital the firm has will generate at least the WACC in returns.
Deliverable: Create an Excel spreadsheet detailing the cost of each scenario, and embed it into a Word document. Provide your recommendations in the Word document as well.
In this scenario various things have been discussed, the inflation, the cost of capital, the WACC and the present value. The case does not involve risk of foreign exchange rate as it has to pay in its own currency. In 2002, the inflation rate was 2.3% after the introduction of Euro currency and the average inflation rate for the last 10 years is 2.24%, which is more than 1% conditional inflation rate by the seller. The company can pay now 97.5% of original payment which is 3.5 million Euros in advance; otherwise it is to be paid within 6 months subject to inflation rate, as the inflation is more than 1 %
Your supervisor has asked for a recommendation on how Navigation Systems, Inc. should handle the payment and the probable cost of each scenario. You know that your firm's weighted average cost of capital is 9%. Assume that a going concern business will, at a minimum, recover the WACC to achieve at least a breakeven financial position. Therefore, any capital the firm has will generate at least the WACC in returns.
Deliverable: Create an Excel spreadsheet detailing the cost of each scenario, and embed it into a Word document. Provide your recommendations in the Word document as well.
In this scenario various things have been discussed, the inflation, the cost of capital, the WACC and the present value. The case does not involve risk of foreign exchange rate as it has to pay in its own currency. In 2002, the inflation rate was 2.3% after the introduction of Euro currency and the average inflation rate for the last 10 years is 2.24%, which is more than 1% conditional inflation rate by the seller. The company can pay now 97.5% of original payment which is 3.5 million Euros in advance; otherwise it is to be paid within 6 months subject to inflation rate, as the inflation is more than 1 %
References: www.ecb.int/pub/pdf/scpwps/ecbwp588.pdf http://www.tradingeconomics.com/euro-area/inflation-cpi