International Finance: investment in Australia (Managing Foreign exchange risk)

Résumé du document

Next PLC is considering to start a series of outlets in Australia. It is estimated that each outlet will cost approximately Aus$ 15m and they would establish 70 outlets over a period of two years. The cost of setting up each outlet includes fixtures and fittings worth Aus$ 4m, which is eligible for tax on a straight-line basis of 20% per annum. The other Aus$ 11m will be spent on a 5-year lease. The market research (costing £2m) has indicated that in the first year, each outlet can expect a sales of Aus$ 12m.

Extraits

[...] Analysis of the Internal Rate of Return and the Weighted Average Cost of capital The internal rate of return (IRR) is my Weighted Average Cost of Capital (WACC) is 11%. The WACC is the profitability rate expected by the company. Here the WACC is superior to the IRR, so the project should not be undertaken. About the market rate we will assume that in average it is higher than the risk free rate (Arnold, 2006). Payback The 5 years duration of the project does not allow getting enough cash flows back to make it profitable. This factor confirms that this project is not worthwhile. [...]

[...] The foreign exchange risk The exchange rates between the Australian dollar and the pound can be a key problem for the project. The customers are going to pay with the local currency, and the branch will have to return to the UK any excess funds. The risk is very important in the growing countries, but less in Australia, as this table shows. (Fxtop.com, 2007) In the last 10 ten years, the average rate was around 2.5 AUD for 1 pound. The company can protect itself against the variation; this part will be discussed later in the report. [...]

[...] Any excess funds from the Australian stores will be returned to the UK at the end of the year. The report is outlining the following: Whether or not the project should be undertaken A strategy for the ongoing management of Forex risk which may arise as a result of such expansion should it go ahead Advice on the organisational structure and financing arrangements which the company should adopt if it were to undertake such a project Contents Introduction 4 First part: Should this project be undertaken? [...]

[...] The main long term challenge is to continue to increase the standard of living of Australian people in particular context: there are more and more elderly people. (OECD, 2006) This background suggests that Australia can be a very good country for an investment project. In a first part the report will developed if the project should be undertaken, then a strategy to manage foreign exchange risk, and finally some advices about the structure and financing arrangements which the company should adopt if it were to undertake such a project. [...]

[...] and Janin, R Cours d'analyse financière, Institute of Technology of Grenoble. [...]