Question Details

How can Sunbelt account for the Indonesian government- position 


1. Accounting for Government Restrictions. Sunbelt Inc. plans to purchase a firm in Indonesia. It
believes that it can install its operating procedure in this firm, which would significantly reduce
the firm- operating expenses. However, the Indonesian government may approve the acquisition
only if Sunbelt does not lay off any workers. How can Sunbelt possibly increase efficiency
without laying off workers? How can Sunbelt account for the Indonesian government- position 
as it assesses the NPV of this possible acquisition?

2. Foreign Acquisition Decision. Florida Co. produces software. Its primary business in Boca
Raton is expected to generate cash flows of $4,000,000 at the end of each of the next 3 years, and
expects that it could sell this business for $10 million (after accounting for capital gains taxes) at
the end of 3 years. Florida Co. also has a side business in Pompano Beach that takes the software
created in Boca Raton and exports it to Europe. As long as the side business distributes this
software to Europe, it is expected to generate $2 million in cash flows at the end of each of the
next three years. This side business in Pompano Beach is separate from Florida- main business.
Recently, Florida was contacted by a Ryne Co. in Europe which specializes in distributing
software throughout Europe. If Florida acquires Ryne Co., it would rely on Ryne instead of its side business to sell its software in Europe, because Ryne could easily reach all of Florida
Company- existing European customers and additional potential European customers. By
acquiring Ryne, Florida would be able to sell much more software in Europe than it can sell with
its side business, but it has to determine whether the acquisition would be feasible. The initial
investment to acquire Ryne Co. would be $7 million. Ryne would generate 6 million euros per
year in profits, and would be subject to a European tax rate of 40%. All after-tax profits would be
remitted to Florida Co. at the end of each year and the profits would not be subject to any U.S
taxes since they were already taxed in Europe. The spot rate of the euro is $1.10 and Florida Co.
believes the spot rate is a reasonable forecast of future exchange rates. Florida Co. expects that it
could sell Ryne Co. at the end of 3 years for 3 million euros (after accounting for any capital
gains taxes). Florida Company- required rate of return on the acquisition is 20%. Determine the
net present value of this acquisition. Should Florida Co. acquire Ryne Co.?




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