【正确答案】Benefits of own investment as opposed to licensing Imoni Co may be able to benefit from setting up its own plant as opposed to licensing in a number of ways. Yilandwe wants to attract foreign investment and is willing to offer a number of financial concessions to foreign investors which may not be available to local companies. The company may be able to control the quality of the components more easily, and offer better and targeted training facilities if it has direct control of the labour resources. The company may also be able to maintain the confidentiality of its products, whereas assigning the assembly rights to another company may allow that company to imitate the products more easily. Investing internationally may provide opportunities for risk diversification, especially if Imoni Co’s shareholders are not well-diversified internationally themselves. Finally, direct investment may provide Imoni Co with new opportunities in the future, such as follow-on options. Drawbacks of own investment as opposed to licensing Direct investment in a new plant will probably require higher, upfront costs from Imoni Co compared to licensing the assembly rights to a local manufacturer. It may be able to utilise these saved costs on other projects. Imoni Co will most likely be exposed to higher risks involved with international investment such as political risks, cultural risks and legal risks. With licensing these risks may be reduced somewhat. The licensee, because it would be a local company, may understand the operational systems of doing business in Yilandwe better. It will therefore be able to get off-the-ground quicker. Imoni Co, on the other hand, will need to become familiar with the local systems and culture, which may take time and make it less efficient initially. Similarly, investing directly in Yilandwe may mean that it costs Imoni Co more to train the staff and possibly require a steeper learning curve from them. However, the scenario does say that the country has a motivated and well-educated labour force and this may mitigate this issue somewhat. (Note: Credit will be given for alternative, relevant suggestions)

【正确答案】Report on the proposed assembly plant in Yilandwe This report considers whether or not it would be beneficial for Imoni Co to set up a parts assembly plant in Yilandwe. It takes account of the financial projections, presented in detail in appendices 1 and 2, discusses the assumptions made in arriving at the projections and discusses other non-financial issues which should be considered. The report concludes by giving a reasoned recommendation on the acceptability of the project. Assumptions made in producing the financial projections It is assumed that all the estimates such as sales revenue, costs, royalties, initial investment costs, working capital, and costs of capital and inflation figures are accurate. There is considerable uncertainty surrounding the accuracy of these and a small change in them could change the forecasts of the project quite considerably. A number of projections using sensitivity and scenario analysis may aid in the decision making process. It is assumed that no additional tax is payable in the USA for the profits made during the first two years of the project’s life when the company will not pay tax in Yilandwe either. This is especially relevant to year 2 of the project. No details are provided on whether or not the project ends after four years. This is an assumption which is made, but the project may last beyond four years and therefore may yield a positive net present value. Additionally, even if the project ceases after four years, no details are given about the sale of the land, buildings and machinery. The residual value of these non-current assets could have a considerable bearing on the outcome of the project. It is assumed that the increase in the transfer price of the parts sent from the USA directly increases the contribution which Imoni Co earns from the transfer. This is probably not an unreasonable assumption. However, it is also assumed that the negotiations with Yilandwe’s government will be successful with respect to increasing the transfer price and the royalty fee.Imoni Co needs to assess whether or not this assumption is realistic. The basis for using a cost of capital of 12% is not clear and an explanation is not provided about whether or not this is an accurate or reasonable figure. The underpinning basis for how it is determined may need further investigation. Although the scenario states that the project can start almost immediately, in reality this may not be possible and Imoni Co may need to factor in possible delays. It is assumed that future exchange rates will reflect the differential in inflation rates between the respective countries. However,it is unlikely that the exchange rates will move fully in line with the inflation rate differentials. Other risks and issues Investing in Yilandwe may result in significant political risks. The scenario states that the current political party is not very popular in rural areas and that the population remains generally poor. Imoni Co needs to assess how likely it is that the government may change during the time it is operating in Yilandwe and the impact of the change. For example, a new government may renege on the current government’s offers and/or bring in new restrictions. Imoni Co will need to decide what to do if this happens. Imoni Co needs to assess the likelihood that it will be allowed to increase the transfer price of the parts and the royalty fee.Whilst it may be of the opinion that currently Yilandwe may be open to such suggestions, this may depend on the interest the government may get from other companies to invest in Yilandwe. It may consider that agreeing to such demands from Imoni Co may make it obligated to other companies as well. The financial projections are prepared on the basis that positive cash flows from Yilandwe can be remitted back to the USA.Imoni Co needs to establish that this is indeed the case and that it is likely to continue in the future. Imoni Co needs to be careful about its ethical stance and its values, and the impact on its reputation, given that a school is being closed in order to provide it with the production facilities needed. Whilst the government is funding some of the transport costs for the children, the disruption this will cause to the children and the fact that after six months the transport costs become the parents’ responsibility, may have a large, negative impact on the company’s image and may be contrary to the ethical values which the company holds. The possibility of alternative venues should be explored. Imoni Co needs to take account of cultural risks associated with setting up a business in Yilandwe. The way of doing business in Yilandwe may be very different and the employees may need substantial training to adapt to Imoni Co’s way of doing business. On the other hand, the fact that the population is well educated, motivated and keen may make this process easier to achieve. Imoni Co also needs to consider fiscal and regulatory risks. The company will need to assess the likelihood of changes in tax rates, laws and regulations, and set up strategies to mitigate eventualities which can be predicted. In addition to these, Imoni Co should also consider and mitigate as far as possible, operational risks such as the quality of the components and maintenance of transport links. Imoni Co should assess and value alternative real options which it may have. For example, it could consider whether licensing the production of the components to a local company may be more financially viable; it could consider alternative countries to Yilandwe, which may offer more benefits; it could consider whether the project can be abandoned if circumstances change against the company; entry into Yilandwe may provide Imoni Co with other business opportunities. Recommendation The result from the financial projections is that the project should be accepted because it results in a positive net present value. It is recommended that the financial projections should be considered in conjunction with the assumptions, the issues and risks, and the implications of these, before a final decision is made. There is considerable scope for further investigation and analysis. It is recommended that sensitivity and scenario analysis be undertaken to take into consideration continuing the project beyond four years and so on. The value of any alternative real options should also be considered and incorporated into the decision. Consideration must also be given to the issues, risks and factors beyond financial considerations, such as the impact on the ethical stance of the company and the impact on its image, if the school affected is closed to accommodate it. Report compiled by: Date: