[SOLVED]

“We better get started on this report,” said Hal to his assistant, Roger, as he straightened up in his seat and fired up his laptop computer. “I’m sure Henry will expect a detailed analysis first thing Monday morning.” Hal Burton, vice president for International Business Development at Siemens Technologies, and his assistant, Roger Manning, were returning to the United States from their seven-day trip to New Delhi, India.
Henry Black, president and chief executive officer of Siemens Technologies, had been contacted by Saini Electronics from India with a proposal of starting a joint venture for the production of circuit boards. Currently, Siemens Technologies was exporting 50,000 circuit boards a year to Indian importers at a per-unit price of $50 including shipping and insurance. The company had managed to obtain an import agreement from the Indian government for a 10-year period, which was due to expire within one year. The pre-tax profit on the exported circuit boards was $15 per unit (Table 1 for cost breakdown) and unit sales were expected to increase at the rate of 3% per year based on the projected increase in the gross domestic product in India.
Based on the discussions held with the Indian counterparts, Hal estimated that the cost of establishing the manufacturing facility in India would be around $3,000,000 at the prevailing exchange rate of $1 = 50 rupees. The Indian partner agreed to invest 50% of the initial outlay. In addition to fixed assets, Hal estimated that $500,000 worth of working capital would be needed for start-up.
Under the tentative terms of the joint venture, Saini Electronics would manage the day-to-day operations of the business with overall supervision being the responsibility of an American chief engineer. Siemens Technologies would turn over the operation to Saini Electronics after seven years, in exchange for full reimbursement of the working capital and a purchase price amounting to 125% of the net book value of the fixed as- sets at that time. With the help of Romesh Saini, the managing director of Saini Electronics, Hal had managed to get the Indian government to reach a tentative agreement whereby at the end of each year, Siemens’ share of net cash flows from the joint venture could be remitted to the United Sates at the prevailing exchange rate.
Hal had checked with the tax authorities in India and found out that fixed assets could be depreciated on a straight-line basis over 10 years. The corporate tax rate in India was 40%, as it was in the United States. After meeting with various suppliers and checking quality control standards, Hal had worked out the details regarding the revised cost structure of the circuit boards (Table 2). The circuit boards manufactured in India would be made of a combination of domestic and U.S. components. Hal figured that the net cost of the components imported from the United States (manufactured by Siemens Technologies) would be $5 per unit and would be supplied to the joint venture at the rate of …………………..................................................................

What did Roger mean when he said that, based on covered interest arbitrage, it made no difference whether Siemens Technologies raised the capital needed for the joint venture in India or in the United States? Do you agree? Explain.
Based on the differential inflation rate projections, what are the expected end of year exchange rates between the U.S. dollar and the Indian rupee for the next seven years?
Based on the “home currency” approach, what should Hal recommend?
As Hal went over the numbers once again, he realized that he had made a major error. One of the machines, which were to be shipped over to India as part of Siemens Technologies’ initial investment, had been accounted for at its book value of $500,000, even though it had an estimated market value of $700,000. The machine could be depreciated on a straight-line basis over seven years. What effect would this error have on Hal’s analysis and recommendation?
As Hal was inquiring about the tax provisions in India, he was told that there was a high probability that the Indian government would offer a reduced tax rate (20%) to foreign investors who used some indigenous raw materials and employed Indians. If this does happen, how would the analysis be affected?
How would Hal’s analysis and recommendation change if Siemens Technologies intends to use this joint venture as a stepping-stone to maintain a permanent position in India and therefore reinvests its earnings in India?
Besides exchange rate fluctuations, what other risk factors would Hal have to take into consideration before making his recommendation?
What are the different ways in which Siemens’s share of the cash flows from the joint venture can be remitted to the United States?

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