Contents

• Executive Summary 2
• Introduction 4
• Economic and political risks in China 4
• Key issues in financing the project 5
• Cost of capital for the project 6
• Risks 8
• Types of inherent risks 8
• Financial Instruments to hedge risk 8
• Recommendation 9
• Conclusion 9
• Bibliography 11

Description

This report is based on the following requirement –
Assume you are an analyst working for BreadTalk, a Singapore Publicly listed company which has business operations in Indonesia, China, Malaysia, the Philippines, Kuwait, Oman, India, Hong Kong, Thailand, Korea, Vietnam, Bahrain and Saudi Arabia. You have been asked to produce a project analysis report on one of their investments. The project is an installation of a fully automated baking equipment in Beijing, China where it can help to reduce labour and improve production efficiency of bread.
The project will cost S$5.0 million or its equivalent in Chinese Renminbi (CR). The financing is obtained from the parent company, whose overall cost of capital (WACC) is 4.0%. The risk free rates of interest in SGD and CR are 1.0% and 1.5% respectively (annual compounding basis). The assumed project life is for 5 years. The projected annual cash inflow for the first two year is S$1.0 million or its equivalent in Renminbi and will increase to S$1.5 million annually for the third and fourth year and $1.8 million in the fifth year. The equipment is expected to carry a salvage value of S$100,000 at the end of the fifth year.
The SGD/CR spot exchange rate is SGD 0.198 to 1 CR.
Tasks:
Your Chief Financial Officer (CFO) has asked for a report on the proposed project. The report should address key issues in foreign investment analysis relevant to the project, in particular the CFO would like the following issues addressed:
- An analysis of the economic and political risks in China in which BreadTalk are likely to encounter.
- A discussion of the key issues in financing of the project.
- A calculation of the cost of capital for the project using suitable capital budgeting technique(s).
- A discussion of the various types of risks inherent in this project together with an evaluation of the appropriate financial instruments to hedge the risks.
- Recommendations of measure to minimize the financing cost of the project.