Founder and President of High and Dry Video (HDV), Genesha production facility a

Question

Founder and President of High and Dry Video (HDV), Genesha production facility and/or expanding the current facility to meet video production equipment. Though a substantial portion of HI currently only operates a production facility in the U.S. HDV is opening a new facility in Europe. The table below summarizes HDV's expected cash flows in the current situation. Assume no tax, no depreciation, no change in net operating working capital (NOWC). Based on the information above and assuming a base scenario using the current exchange rate of $1.1/ with 40% chance, $1.0/ with 50% chance and $1.2/ with 10% chance. Calculate and explain HDV's operating exposure if it does not expand production in Europe. If HDV opens a new production facility in Europe, the production costs would be 145, 000 per unit, plus an addition of 1,000,000 in operating expenses at the new facility, everything else stays the same 2 before. Discuss the following strategy that HDV might consider to manage the firm's operating exposure: Produce in each market the number of units HDV expects to sell. Be specific on the impact of this strategy on managing HDV's operating exposure. BA582 only: what other approaches could HDV adopt to manage the operating exposure. Without calculations, explain the rational behind each.

Explanation / Answer

a.Schedule of operating exposure in current senerio.

b.

Unit sold in europe 300 Price per unit 1,75,000 Amount Received in euro 5,25,00,000 Dollar per Euro 1.06 Total proceeds in europe in Dollars 5,56,50,000 Unit sold in US 100 Price per unit ($) 2,25,000 Total Proceeds in $ 2,25,00,000 Total Revenue received 7,81,50,000 Less: Cost of goods sold 6,40,00,000 operating Expenses 40,00,000 Net Operating Exposure($) 1,01,50,000 Interest is not a part of operation.

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