Financial Evaluation

Executive summary

This report is about a financial appraisal for whether M&S company open 50 stores in Germany. It consists of 4 big parts: investment appraisal, sensitivity of exchange rate and cost of capital, foreign exchange risk, and organizational structure.

In the investment appraisal, it needs to consider a lot of information, such as funding, taxation, CAMP, WACC, inflation rate and exchange rate, and also give some relative assumption and prediction, like depreciation. According to using NPV, IRR and payback period, the result of these three methods are consistent. This project can be invested.

And then analyze the sensitivity of exchange rate and cost of capital in this report. The change of these two data will lead to the change of NPV from positive to negative which will affect the decision for this project. Use 2 graphs to indicate the relationship between NPV and exchange rate and cost of capital. The cost of capital increases and the NPV decrease and vice versa. And when the foreign currency appreciates, NPV will increase.

Moreover, evaluate three different exchange risk in the project, such transaction cost, translation cost and economic cost, and each risk is given relative exposure management, using forward contract, option, financing, local debt, and so on.

Lastly, analysis whether the company set up a subsidiary or a branch in Germany. Comparing with the different factors between subsidiaries and branch, and give the reasons why the company should establish a subsidiary rather than a branch.

Table of contents

1. Introduction

2. Investment appraisal

2.1Funding

2.2CAPM

2.3WACC

2.4Inflation and exchange risk

2.5Taxation

2.6 NPV and IRR

2.7 Payback period

3 Sensitivity of analysis

3.1 Cost of capital

3.2 Exchange rate

4. Foreign exchange exposure

4.1. Transaction exposure

4.2 Translation exposure

4.3 Economic exposure

5. Exposure management

5.1 Transaction management

5.1.1 Forward foreign exchange contract

5.1.2 Option

5.1.3 Financing

5.2 Translation management

5.3 Economic management

6. Organizational structure

7. Conclusion

8.Reference

9. Appendix

1. Introduction

M&S want to open 50 stores in Germany, as a foreign investment, it needs to consider a lot of uncertainty and risk. Initially, evaluate this project whether it is worth investing, and then compare with the change of the cost of capital and exchange rate, the NPV has different result. Moreover, the most uncertain factor is exchange rate for investing abroad, and analysis risk in this project from transaction exposure, translation exposure and economic exposure. Depending on different risk, using the internal and external techniques to reduce or avoid the exchange risk. Finally, a proper organizational structure can also be used to get rid of risk and improve the profit ability of this project. Assumption for this project: 20%depreciation for fixtures and fittings each year.

2. Investment appraisal

In order to make a correct decision about whether M&S should open 50 stores in Germany, I use three different investment appraisal techniques, such as NPV, IRR, and payback period.

2.1 Funding

Funding is the first procedure to start an investment abroad. In order to calculate the WACC easier, this project should borrow £221m?€250m?from bank of England for initial investment for the rental cost and also borrowed €250m from parent company as equity.