BFI CASE

Objective: To evaluate the proposal

Method used: Net Present Value (from the parent company viewpoint)
Issues to be considered while evaluating the proposal:
Cash flows from parent to subsidiary and subsidiary to the parent:
Parent to the subsidiary : Initial Investment
Subsidiary to the parent: Royalty, Management fee and the percentage of the dividend transferred, if subsidiary makes profit.
Other Issues: As the parent company is already exporitng, what is the opportunity cost.
Opportunity cost:

Evaluation Year: 1996

Incremental cashflows from the project:

WORKING:
INITIAL INVESTMENT IN PARENT CURRENCY TERMS:

Year

Currency
1996
1996
1997

E/R

45000

2250

18000

2272

1997
17800

1998
20200

Profit margin

0.25

0.25

Profit(Dom)

4450

5050

294694

337064

0.24

0.24

BFI (ITALY) PROJECTED CASHFLOWS:

1996
Sales in Italy
(Domestc)

Sales (Int)
Profit margin
Profit(Int)

70726.56 80895.36

Royalty & Mgmt fee (Dom)

(15% of Dom Sales)

Royaly & Mgmt fee (Int)

(15% of Int Sales)

Taxable Income (Dom)

(Profit Dom- Royaly& Mgmt fee)

Taxable Income (Int)

(Profit Intl -Roylaty & Mgmt fee)

2670

3030

44204.1

50559.6

1780

2020

26522.46 30335.76

Tax on domestic
(25% for year 1 & 30% thereafter)

445

Tax on Intl
(15% for year 1 and 20% thereafter)

606

3978.369 6067.152

Total Profit (Dom+Intl)

23879.091 25682.61

Transferable Dividends
(90% for first 5 years & 75% thereafter)

21491.182 23114.35

OPPORTUNITY COST WORKING:

(Based on expected growth rate
as per Table-7)
Year

Swiss (Exp) Profit

1997
1998
1999
2000
2001
2002
2003

BFI (Parent Cash flows)

(Assumed that parent receives the
cashflows in the same it is incurred)

1996

58.32
62.9856
68.024448
73.466404
79.343716
85.691213
92.546511

5.832
6.29856
6.802445
7.34664
7.934372
8.569121
9.254651

1997

1998

Royalties & Management Fees

(In Lira terms)

46874.1

Dividends Transferred (In Lira terms)

Total Cash Flows (In Lira terms)
E/R Lira Per Ringy

53589.6

21491.182 23114.35
68365.282 76703.95
2250

Total Cashflows (In Ringy terms)

2272

2295

30.090353

33.4222

14.46

15.92

Opportunity cost (Lost Exports)

137.54137 155.6706
Salvage Value (Terminal Value)
(Assumed to be In Ringy terms)

550.16549 622.6824

Initial Investment

51.45895937

Total Cash flows

-51.45895937

15.630353

Cost of Capital at 16.66%

Present Value

-51.45895937

13.398211 12.86023

NPV

43.29983387

17.5022

nsferred, if subsidiary makes profit.

Cashflows from the Swiss operation

Cashflows from the Kenyan operation
Cashflows from the exports made by the parent company

In Ringy

In Million
Presnt Value

Discount
rate

20
24.67
7.92

20
24.67
17% 6.788959369
51.45895937

1999
24700

2000
30300

2001
35900

2002
40000

2003
47500

0.25

0.23

0.23

0.22

0.19

6175

6969

8257

8800

9025

391623

492757

590263

722342

823175

0.24

0.22

0.22

0.2

0.18

93989.52

108406.54

129857.86 144468.4 148171.5

3705

4545

58743.45

73913.55

2470

2424

2872

35246.07

34492.99

41318.41

741

727.2

861.6

840

570

7049.214

6898.598

8263.682

7223.42

4939.05

29925.856

29291.192

35065.128 30853.68

21086.2

26933.2704

26362.0728

Kenya (Exp) Profit

5385

6000

7125

88539.45 108351.3 123476.3

2800

1900

36117.1 24695.25

31558.6152 23140.26 15814.65

BFI (Dream) Profit

Exports(10%)

Total Exp Total Profit

(Cflows)

46.7793247
52.81385759
59.62684521
67.31870825
76.00282161
85.8071856
96.87631254

4.490815171
5.070130328
5.724177141
6.462595992
7.296270875
8.237489818
9.300126004

49.339769
54.12572659
59.37592207
65.13538651
71.45351901
78.38451035
85.98780785

4.144541
4.546561
4.987577
5.471372
6.002096
6.584299
7.222976

154.4391
169.9252
187.0272
205.9205
226.8001
249.8829
275.4106

1999

2000

2001

2002

2003

14.4673558
15.9152514
17.5141994
19.2806088
21.2327381
23.39091
25.7777529

62448.45

78458.55

93924.45 114351.3 130601.3

26933.2704 26362.0728
31558.6152 23140.26 15814.65
89381.7204 104820.6228 125483.0652 137491.6 146415.9
2218
40.29834103

17.51

2341

2364

2388

2412

44.7760029 53.08082284 57.57603 60.70311

19.28

21.23

23.39

25.77

187.7019838 223.4331482 264.8743655 319.2387 360.9764

0.59
750.8079351 893.7325929 1059.497462 1276.955 1443.905

22.78834103

25.4960029 31.85082284 34.18603 35.52311 182.976859

14.3531358 13.76525343 14.74045183 13.56178 12.07973 94.7587932