Posted: September 16th, 2017

Project

MBA619 Course Individual Student Project

Overview

The apparel market is a global business.  It is a labor-intensive industry, and often follows the cheapest labor market.  It is also a time-sensitive business; there are economic advantages to being closer to your market.  The tariffs in the textile and apparel industry are complex and must be considered.

In this project, you will complete a detailed NPV analysis of various options for building, operating and sourcing for a global sweater manufacturing facility.  Options will include a plant in the U.S. or a foreign country.

You will evaluate issues of global finance and economic conditions will include considerations of currency rates, foreign inputcosts, transportation costs, project financial performance.  You will have various milestones to complete over the course and your final analysis will be due in the last week of class.Your final deliverablewill include all of the prior weekly financial analyses of the investment alternatives, a brief comparisonstating the pros and cons of each option, and a final project-build recommendation to include your rationale.

Each weeklyand the final deliverable will be accumulated and submitted in a single MS Excel workbook.

NPV Analysis for U.S. Investment

Your first option to consider is building the plant in the U.S.  This will be the base case for comparison as you consider direct foreign investment (DFI).

Build a table in Excel and calculate the NPV of a plant in the United States.  Use the following assumptions:

1. The project life is ten years with no salvage value
2. Inflation in the US is expected to be 3% annually
3. The plant will cost $4,000,000 to construct and will be incurred in Year 0
4. Estimated sales for sweaters from your plant in Year 1 are projected to be 100,000.  Growth is estimated at 5% annually
5. Sweaters will be priced at $30 each in Year 1
6. Wool costs $9/pound in the US in Year 1
7. Each sweater requires 2 pounds of wool
8. Labor costs in the US are $8/hr in Year 1
9. Labor productivity in the U.S. is 4-sweaters per hour
10. Assume a corporate tax rate of 35%
11. Depreciation is on a straight line basis over 5 years with no salvage value
12. The risk free rate of return is 3%
13. The S&P 500 has been returning 8%
14. Your firm typically returns about 20% more than the S&P500

Foreign Investment

Your next option is building the plant in China.  Assume all output from the facility will be sold into the domestic China market. Calculate the NPV of a DFI (show NPV in Chinese currency units, and converted to USD based on the currency exchange rate per the CIA web site link below).

CIA website: https://www.cia.gov/library/publications/the-world-factbook/docs/notesanddefs.html#2076.

Use the following assumptions:

1. The project life is ten years with no salvage value
2. Inflation is expected to be __% annually (research at CIA web site).
3. The plant construction cost incurred in Year 0 is $1,400,000 (convert into local currency at current exchange rate per CIA web site).
4. Estimated sales for sweaters from your plant in Year 1 are projected to be 100,000.  Growth is estimated at 12% annually.
5. Sweaters will be priced at equivalent of 6 USD converted to local currency per exchange rate each in Year 1.
6. Wool costs 1.80 USD (convert)/pound in Year 1.
7. Each sweater requires 2 pounds of wool.
8. Labor cost is 0.80 USD (convert)/hr in Year 1.
9. Labor productivity is 2-sweaters/hr.
10. Assume a tax rate of 25%
11. Depreciation is on a straight line basis over 5 years with no salvage value
12. The risk free rate of return is 3%
13. The S&P 500 has been returning 12%
14. Your firm is typically returns about 70% more than the S&P500

Exporting to the US

Your next option in your project is building the plant in China, but exporting the product back to the U.S. for sale.

Construct a table in Excel and calculate the NPV of a plant in China that exports product to the U.S. market. Start with your NPV spreadsheets from the last two weeks, and add the following adjustments:

1. The current exchange rate is that used in Week-3/1 USD.
2. Transportation from your China plant to the U.S. is $1/UNIT
3. The current tariff on apparel imports is 15% of value
4. The finished goods are transferred into the U.S. at a value of 50% over variable cost
5. Assume the discount rate, tax rate and depreciation are taken as the U.S. project in Week-2

Calculate the following:

• Project NPV in USD
• Project NPV if the exchange rate changes by +/-20%, and by +/-70%

Final Project Deliverable

For your final deliverable must combine all of the previous milestones adjusted per any feedback.Addyourcomparative analysis of each option and make your final recommendation.

1. Investment Options comparison referring to each NPV analysis
2. Recommendation on Investment with financial rationale

Your final recommendation is your rationalized decision on where to build and where to ship and sell the product.  Your decision rationale must be based onproject financial performance.

MBA619 Business Analysis Tips

In the corporate world, when you are assigned to complete a business case analysis, a marketing or business plan, follow these basic rules:

1. Always keep in mind, “…who your reader is”. In all cases, the reader will be your firm’s internal management team and may include the Board of Directors/Advisors and Banker. An exception would be a business plan which will also be read by potential outside investors or shareholders.
2. Your content must relate…eliminate non-essential or peripheral information that does not have a direct bearing on the firm’s given project or strategy.
3. Distill your analysis down into concise packages of information that your reader can quickly assimilate and understand. Your reader does not want to read volumes of extra information to locate items relevant to the firm’s project criteria…it is your job to compress information into the “need to know” content that quickly and easily communicates to your reader.
4. Include simple tables for visual comparisons of your “bottom line” outcomes/assessments of project options or scenarios.
5. Use Excel charts/graphs to illustrate relevant historical data and any data trends.
6. Provide “in-text” citations so your reader can drill further into your source material if desired.
7. Proof read your work product to assure it is free of:
   1. Redundant information
   2. Unclear communication
   3. Confusion created by mixing unrelated information under a single heading
   4. Grammar errors
   5. Spelling errors
8. Use a standard outline and purpose familiar to your reader as follows: