Question

The Centralia Corporation is a U.S. manufacturer of small kitchen electrical appliances. It has decided to construct a wholly owned manufacturing facility in Zaragoza, Spain, to manufacture microwave ovens for sale in the European Union. The plant is expected to cost €5,500,000, and to take about one year to complete. The plant is to be financed over its economic life of eight years. The borrowing capacity created by this capital expenditure is $2,900,000; the remainder of the plant will be equity financed. Centralia is not well known in the Spanish or international bond market; consequently, it would have to pay 7 percent per annum to borrow euros, whereas the normal borrowing rate in the euro zone for well-known firms of equivalent risk is 6 percent. Alternatively, Centralia can borrow dollars in the United States at a rate of 8 percent.

Create an Excel spreadsheet to demonstrate how to calculate the benefit of using concessionary loan

Answer 1

to get this benefit the centralia has to enter into the currency swap contract with the Spanish Firm which can borrow At the rate of 6% while if the centralitya borrow directly from the Euro zone they have to pay 7% per annum and due to this transaction centralia will get the benefit of 1% per year of interest.

if we want the Dollar value of the benifit here we need to have the Exchange rate given suppose the exchange rate is 1.33$/ 1 Euro.

we will need the 2,900,000/1.33 = 2180451.12

Euro loan required = 5,500,000-2180451.12 =

3319548.88

interest savinng per year= 3319548.88*1% = $33195.49