QuestionGeo Tech – Decision to Expand Geosystems Technology Group (Geo… Geo Tech – Decision to Expand?eosystems Technology Group (Geo Tech) was founded in 2006 to develop and sell a geographic information system (GIS). The goal was for timberland owners to use the technology to monitor harvesting activities under sales contracts. As a response to rising concerns about the sustainability of natural resources, the company had responded by developing a portfolio of products that enabled companies to access and explore data on their timber holdings, optimize development, and maximize long-term value. The Founder of the company, Mr Thomas wants to establish a Geo Tech facility in Canada where systems of this type were not yet regularly employed.?eo Tech ProductsGeo Tech’s products presented geographic information digitally along spatial and temporal dimensions, allowing vast amounts of data to be manipulated intuitively for a wide variety of analytic purposes. Applications might include assessing the environmental impact of development, calculating the best delivery route for resources during natural disasters, or documenting the environmental impact of public works projects. Geo Tech leveraged these capabilities with the timber industry in mind.Within a digital model of a given client’s site, Geo Tech’s sophisticated suite of products projected ecological system data dynamically, enabling the client to simulate and forecast outcomes for a variety of management strategies. A timberland owner could consider the long-term implications of various harvesting procedures, replanting choices, and development projects such as road and dam building. Information on the sites was regularly updated with spot visits. One advantage of Geo Tech’s system was its ability to store and track timber contracts, which could be quite complex (specifying, for example, which types of trees could be harvested when, what kinds of access disturbances?uch as road building?ere allowed, how long the contract lasted, and how the area would be treated after harvesting).?roduct LicensingGeo Tech offered three levels of service. Baseline service, called Tracker, simply tracked usage of timber resources. The midlevel service, Foresight, included a broad suite of plug-in modules that provided most of the sophisticated modeling capabilities users desired, making it the most popular choice. The top-level service, Oasis, included a high degree of customized development that would automate tasks that were desired by particular users.?lients signed three-to-six-year contracts. The contracts stipulated annual licensing fees, which provided remote access to models of their site and toolkits stored on Geo Tech-managed servers. The constant upgrading, maintenance, and ongoing development of plug-ins, combined with the need to customize hardware to optimize software routines, made it impossible to host site models on client systems. The fee structure was relatively simple: Geo Tech charged an initial setup fee of USD18,000 and annual licensing fees of USD3,000, USD8,000, and USD14,000 for Tracker, Foresight, and Oasis, respectively.?anadian Market DecisionMr Thomas could conceivably expand the existing two sites in the United States. Geo Tech programs required a great deal of company information, and a few Canadian companies had expressed concerns about storing such data in the United States. This perception may have been a reaction to the concerns that U.S. companies were more likely to be targets of cyber surveillance. Mr Thomas believes any fears in the industry regarding data location would dissolve over time and was confident that any client he might gain from a Canadian facility would eventually be willing to move to a U.S. site. The Canadian investment is, therefore, viewed as a temporary investment. ?r Thomas plans to liquidate the Canadian facility after five years and transfer clients to one of the U.S. sites.?r Thomas is a careful businessman and he wanted to be sure that the decision to enter the Canadian market would turn out to be a sound business decision. He asked an associate at the company, Jessica Engle to conduct an analysis. After some discussion, the two agreed on the following assumptions for the analysis:????he investment would last for five years only.????ll contracts would be at the Foresight level, for three years, and would be priced in Canadian dollars. Given the exchange rate at the time of USD 0.860 per CAD and rounding to the nearest thousand, the fees would be priced at CAD21,000, and the annual licensing fee would be priced at CAD9,000. These contract prices are not expected to change over the coming five years.????he company would generate 20, 30, and 20 new contracts over the first three years, respectively, and 10 contracts in each of the last two years.????eo Tech would initially have to invest CAD840,000 in equipment, which would be depreciated straight-line over three years with no assumed salvage value.????he operation would have the following cost structure. Every setup of a contract would cost CAD14,000. Other cash operating costs would be CAD240,000 a year if there were less than 55 ongoing contracts and CAD360,000 otherwise.????he tax rate on all earnings would be 35%.?r Thomas believes he would obtain all possible clients after the five-year mark and he only considers contracts sold in the first five years of the project. Because he believes he would obtain those customers after the fifth year anyway, Mr Thomas does not include annual licensing fees beyond the fifth year of the project for the existing contracts at the end of 5 years.?r Thomas and Engle also discussed appropriate assumptions regarding the timing of revenues and costs. They agreed to consider annual cash flow estimates with the setup and first annual payment occurring in the same year.?ecognizing that the contracts would be priced in Canadian dollars and that most costs would be incurred in Canadian dollars, Mr Thomas and Engle knew they would have to make adjustments for exchange rates. Engle is aware that the typical approach is to convert foreign currency cash flow estimates to domestic currency equivalents at the anticipated future exchange rates and then discount those at the usual (domestic) discount rate. She had therefore obtained a forecast of the Canadian dollar/U.S. dollar exchange rate, which is presented in Table 1 below.?able 1: Year-End Exchange-Rate Forecast (USD/CAD)?021 (Spot Rate)- 0.8602022 -0.8252023 0.8052024 0.7902025 0.7802026 0.775??r Thomas and Engle also agreed that the risks of the project’s cash flows are comparable to those of their U.S. contracts. Therefore, they decided to use the weighted average cost of capital of the Geo Tech i.e. 9.65% to discount the project.?inally, Mr Thomas and Engle has debated the effects of inflation on the analysis and the magnitude of any home office costs (in U.S. dollars). The market pressures have largely limited Mr Thomas’s ability to raise prices, hence, the fee structure will remain constant over the five-year period. Operating costs (set up costs and other cash operating costs) will increase with inflation. Inflation in the United States is quite low and expected to average about 1.50% over the next five years. Inflation in Canada is expected to be slightly higher at 1.75%.?r Thomas is aware that the Canadian dollar had depreciated by about 12% over the previous three years and is therefore somewhat concerned about how currency value changes might affect any investment in the future.?Questions?.?????xplain the nature of foreign exchange exposure faced by Geo Tech if they are to accept this project. ???????????????????????????(5 Marks)?.?????alculate the annual net operating cashflow of the project in CAD considering the given information and assumptions in the case. Remember to include the inflation effect as well. ???????????????????????????????10 Marks)?.?????ased on the forecasted exchange rates given, calculate the NPV (Net Present Value) of the project in USD. Calculate the IRR of the project as well. Should Geo Tech continue with this project? Explain your decision. ?(7 Marks)?.?????ow would you expect the assumptions about the inflation rate in US and Canada will affect the value of USD and CAD? Explain your answer based on the theory. You can provide additional references to justify your answer. ??????????????????????????????????????????(5 Marks)?.?????alculate your own forecast of Purchasing Power Parity based exchange rate using the given information. Use these rates to check if your decision in Q3 above will be the same. Explain and justify your decision. (Hint: You need to re-calculate the NPV and IRR here.)(8 Marks)?.?????here are two arguments related to the Purchasing power parity theory. PPP may hold for some countries than for others and PPP may hold better in short term than in long term. Explain this argument providing quality references from research journals, additional data or illustrations of data, if required. Write your opinion if PPP will hold for Canada for the time period of the project.(Note: Providing references for each sentence shows lack of your own ideas. You should not refer each sentence or paraphrase each sentence from other sources. Your writing should include your own views and explanations as well) ???????????????????????????????????????15 Marks)?BusinessEconomicsFINANCIAL202
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