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1、Part V Case Studies Case V.1The International Machine Corporation The International Machine Corporation (IMC) is a large, well-established manufacturer of a wide variety of food processing and packaging equip- ment. Total revenue for last year was $12 billion, of which 45% was generated outside of t
2、he United States. IMC has subsidiaries in 23 coun- tries, with licensing arrangements in eight others. The management of IMC is currently contem- plating the establishment of a subsidiary in Mexico. IMC has been exporting products to Mexico for several years, and its international division believes
3、there is suffi cient demand for the product and that a Mexican investment might be appropriate at this time. More impor- tant, management believes that the Mexican mar- ket is expanding, that the economy is growing, and that producing such products locally appears to be consistent with the national
4、aspirations of the Mexican government. Mexican infl ation is projected to be 20% annually, and the U.S. infl ation rate is expected to be 10% annually. The current exchange rate is $1 ? Ps 7.2 and is expected to remain fi xed in real terms over the life of the investment. The following list contains
5、 details of the contemplated investment. A. Initial investment 1. It is estimated that it would take one year to purchase and install plant and equipment. 2. Imported machinery and equipment will cost $9 million. No import duties will be levied by the Mexican government. With a small allowance for b
6、anking fees, the bill will come to Ps 65.5 million. 3. The plant would be set up on govern- ment-owned land that will be sold to the project for Ps 6.5 million. 4. IMC plans to maintain effective control of the subsidiary with ownership of 60% of equity. The remaining 40% is to be distrib- uted wide
7、ly among Mexican fi nancial insti- tutions and private investors. Accordingly. IMC needs to invest U.S. $6 million in the project. B. Working capital 1. The company plans to maintain 5% of annual sales as a minimum cash balance. 2. Accounts receivable are estimated to be 73 days of annual sales. 3.
8、Inventory is estimated to be 20% of annual sales. 4. Accounts payable are estimated to be 10% of annual sales. 5. Other payables are estimated to be 5% of annual sales. 6. Licensing and overhead allocation fees are paid annually at the end of the year. C. Sales volume 1. Sales volume for the fi rst
9、year is estimated to be 200 units. 2. Selling price in the fi rst year will be Ps 458,000 per unit. 3. Unit sales growth of 10% is expected dur- ing the project life. 4. An annual price increase of 20% is expected. D. Cost of goods sold 1. The U.S. parent company is expected to provide parts and com
10、ponents adding up to Ps 59,000 per unit in the fi rst year of operation. These costs (in U.S. dollars) are 603 Source: This is an edited version of “The International Machine Corporation: An Analysis of Investment in Mexico,” by Vinod B. Bavish, University of Connecticut, and Haney A. Shawkey, State
11、 University of New York at Albany. Permission to use this case was provided by Professors Bavishi and Shawkey. 41504_Pt5_Case_Studies_p603-608 3/6/02 8:12 PM Page 603 expected to rise on an average of 10% annually, in line with the projected U.S. infl ation rate. 2. Local material and labor costs ar
12、e expected to be Ps 137,000 per unit, with an annual rate of increase of 20%. 3. Manufacturing overhead (without deprecia- tion) is expected to be Ps 9.2 million the fi rst year of operation. An average rate of increase of 15% is expected. 4. Depreciation of manufacturing equipment is to be computed
13、 on a straightline basis, with a projected life of 10 years and zero salvage value to be assumed. E. Selling and administrative costs 1. The variable portion of selling and admin- istrative costs are expected to equal 10% of annual sales revenue. 2. Semifi xed selling costs are expected to equal 5%
14、of the fi rst years sales. These costs will then rise at 15% annually. F . Licensing and overhead allocation fees 1. The parent company will levy Ps 23,000 per unit as licensing and overhead allocation fees, payable at year end in U.S. dollars. 2. This fee will increase 20% per year to compensate fo
15、r Mexican infl ation. G. Interest expense 1. Local borrowings can be obtained for work- ing capital purposes at 15%. Borrowing will occur at the end of the year with the full years interest budgeted in the following year. 2. Any excess funds can be invested in Mexican marketable securities with an a
16、nnu- al rate of return of 15%. Investment will be made at the end of the year, with the full years interest to be received in the following year. H. Income taxes 1. Corporate income taxes in Mexico are 42% of taxable income. 2. Withholding taxes on licensing and over- head allocation fees are 20%. 3. The parent companys effective U.S. tax rate is 35%, which is the rate used in analyzing investment projects. It can be assumed that the parent company can take appropriate credits for taxes paid
