International Financial Management
14th Edition
ISBN: 9780357130698
Author: Madura
Publisher: Cengage
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Suppose that Kittle Co. is a U.S. based MNC that is considering setting up a subsidiary in Singapore. Kittle would like this subsidiary to produce and sell guitars locally in Singapore, and needs assistance with capital budgeting. The duration of this project is four years, with an initial investment of S$20,000,000 (Singapore dollars).
Kittle Co. managers provide you key information regarding the project.
1.
The government in Singapore will tax any remitted earnings at a rate of 10.00%.
2.
The subsidiary will remit all of it’s after-tax earnings back to the parent.
3.
The forecasted exchange rate of the Singapore dollar over the four-year period is $0.50.
4.
The salvage value is S$12,000,000, which will be paid by the Singapore government in exchange for ownership of the subsidiary after four years.
5.
The required rate of return is 15.00%.
Furthermore, no funds can be remitted from the subsidiary to the parent until the subsidiary is sold for the salvage value at the…
Suppose that Kittle Co. is a U.S. based MNC that is considering setting up a subsidiary in Singapore. Kittle would like this subsidiary to produce and sell guitars locally in Singapore, and needs assistance with capital budgeting. The duration of this project is four years, with an initial investment of S$20,000,000 (Singapore dollars).
Kittle Co. managers provide you key information regarding the project.
1.
The government in Singapore will tax any remitted earnings at a rate of 10.00%.
2.
The subsidiary will remit all of it’s after-tax earnings back to the parent.
3.
The forecasted exchange rate of the Singapore dollar over the four-year period is $0.50.
4.
The salvage value is S$12,000,000, which will be paid by the Singapore government in exchange for ownership of the subsidiary after four years.
5.
The required rate of return is 15.00%.
Furthermore, no funds can be remitted from the subsidiary to the parent until the subsidiary is sold for the salvage value at…
The CFO of Expansion Group Ltd. has been presented with an opportunity to undertake a 7-year project in Turkey. As an emerging market, some incentives are available for foreign direct investment (FDI) in the country and she would like to evaluate this proposal.The following data is available for the evaluation of the project:
The project investment is expected to cost £3,500,000, payable at the start of the project. Of this amount, £3,000,000 is a capital investment, with the remainder required for set up costs and other project related expenses. (Ignore depreciation for the purpose of this exercise.)The after-tax cash inflows have been estimated at £800,000 per year for the duration of the project. An opportunity cost of expansion in the UK has been identified and valued at £725,000.Costs for a visit to Turkey to evaluate the location and for meetings with the Turkish investment authority (ISPAT) have been recorded as £50,000.The company is publicly traded and the βeta of its stock is…
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- One of the important components of multinational capital budgeting is to analyze the cash flows generated from subsidiary companies. Consider this case: Sacramone Products Co. is a U.S. firm evaluating a project in Australia. You have the following information about the project: • The project requires an investment of AU$1,230,000 today and is expected to generate cash flows of AU$1,200,000 at the end of each of the next two years. • The current exchange rate of the U.S. dollar against the Australian dollar is $0.7877 per Australian dollar (AU$). • The one-year forward exchange rate is $0.8109 / AU$, and the two-year forward exchange rate is $0.8455 / AU$. • The firm’s weighted average cost of capital (WACC) is 9%, and the project is of average risk. What is the dollar-denominated net present value (NPV) of this project? $933,397 $777,831 $738,939 $855,614arrow_forwardSuppose that Kittle Co. is a U.S. based MNC that is considering setting up a subsidiary in Singapore. Kittle would like this subsidiary to produce and sell guitars locally in Singapore, and needs assistance with capital budgeting. The duration of this project is four years, with an initial investment of S$10,000,000 (Singapore dollars). The required rate of return is expected to be 15.00% for all four years of the project. _____________________________ Year 0 Year 1 Year 2 Year 3 Year 4 Cash Flows to Parent, excluding Salvage Value $2,100,000 $2,100,000 $3,600,000 $3,900,000 Initial Investment $10,000,000 Which of the following most closely approximates the break-even salvage value? $3,478,975 $2,783,180 $3,131,078 $2,435,283arrow_forwardDelta Company, a U.S. MNC, is contemplating making a foreign capital expenditure in South Africa. The initial cost of the project is ZAR13,600. The annual cash flows over the five-year economic life of the project in ZAR are estimated to be 4,280, 5,080, 6,070, 7,060, and 7,900. The parent firm’s cost of capital in dollars is 9.5 percent. Long-run inflation is forecasted to be 3 percent per annum in the United States and 7 percent in South Africa. The current spot foreign exchange rate is ZAR/USD = 3.75. a. Calculating the NPV in ZAR using the ZAR equivalent cost of capital according to the Fisher effect and then converting to USD at the current spot rate. b. Converting all cash flows from ZAR to USD at purchasing power parity forecasted exchange rates and then calculating the NPV at the dollar cost of capital. c. Are the two dollar NPVs different or the same? multiple choice Different Same d. What is the NPV in dollars if the actual pattern of ZAR/USD exchange…arrow_forward
- Capital Budgeting Analysis Wolverine Corp. currently has no existing business in New Zealand but is considering establishing a subsidiary there. The following information has been gathered to assess this project: The initial investment required is $50 million in New Zealand dollars (NZ$). Given the existing spot rate of $.50 per New Zealand dollar, the initial investment in U.S. dollars is $25 million. In addition to the NZ$50 million initial investment for plant and equipment, NZ$20 million is needed for working capital and will be borrowed by the subsidiary from a New Zealand bank. The New Zealand subsidiary will pay interest only on the loan each year, at an interest rate of 14 percent. The loan principal is to be paid in 10 years. The project will be terminated at the end of year 3,when the subsidiary will be sold. The price, demand, and variable cost of the product in New Zealand are as follows: YEAR PRICE DEMAND VARIABLE COST 1NZ$50040,000 units NZ$302NZ$51150,000 units NZ$353…arrow_forwardCapital Budgeting Analysis Wolverine Corp. currently has no existing business in New Zealand but is considering establishing a subsidiary there. The following information has been gathered to assess this project: The initial investment required is $50 million in New Zealand dollars (NZ$). Given the existing spot rate of $.50 per New Zealand dollar, the initial investment in U.S. dollars is $25 million. In addition to the NZ$50 million initial investment for plant and equipment, NZ$20 million is needed for working capital and will be borrowed by the subsidiary from a New Zealand bank. The New Zealand subsidiary will pay interest only on the loan each year, at an interest rate of 14 percent. The loan principal is to be paid in 10 years. The project will be terminated at the end of year 3,when the subsidiary will be sold. The price, demand, and variable cost of the product in New Zealand are as follows: YEAR PRICE DEMAND VARIABLE COST 1NZ$50040,000 units NZ$302NZ$51150,000 units NZ$353…arrow_forwardDelta Company, a U.S. MNC, is contemplating making a foreign capital expenditure in South Africa. The initial cost of the project is ZAR11,200. The annual cash flows over the five-year economic life of the project in ZAR are estimated to be 3,360, 4,360, 5,350, 6,340, and 7,300. The parent firm’s cost of capital in dollars is 9.5 percent. Long-run inflation is forecasted to be 3 percent per annum in the United States and 7 percent in South Africa. The current spot foreign exchange rate is ZAR/USD = 3.75. Calculating the NPV in ZAR using the ZAR equivalent cost of capital according to the Fisher effect and then converting to USD at the current spot rate. Converting all cash flows from ZAR to USD at purchasing power parity forecasted exchange rates and then calculating the NPV at the dollar cost of capital. Are the two dollar NPVs different or the same? multiple choice Different Same 4.What is the NPV in dollars if the actual pattern of ZAR/USD exchange rates is: S(0) = 3.75, S(1) =…arrow_forward
- International Foods Corporation, a U.S.-‐based food company, is considering expanding its soup-‐processing operations in Switzerland. The company plans a net investment of $8 million in the project. The current spot exchange rate is SF6.25 per dollar (SF = Swiss francs). Net cash flows for the expansion project are estimated to be SF5 million for 10years and nothing thereafter. Based on its analysis of current conditions in Swiss capital markets, International Foods has determined that the applicable cost of capital for the project is 16 percent. Calculate the net present value of the proposed expansion project.arrow_forwardMasada Energy is considering setting up a bottling plant in Namibia or Zimbabwe. The project is mutually exclusive project. The project requires R150 million. The WACC is 9% in Namibia and 11% in Zimbabwe. The corporate tax is 25% in Namibia and 30% in Zimbabwe. The company will depreciate the projects at 20% per annum in both countries. The company expect not residual value at the end of the projects in either countries. The management has provided you with the following expected cash flows from each of the countries under consideration. NAMIBIAN CASHFLOWS YEAR 1-5 1 2 3 4 5 R52,000,000 R44,670,000 R87,500,000 R78,000,000 R98,750,000 ZIMBABWEAN CASHFLOWS YEAR 1-5 1 2 3 4 5 R40,600,000 R56,000,600 R60,700,000 R82,000,000 89,000,000 As the Finance Director at Masada, you have tasked by the board to evaluate these projects and advise them which of the project the company must undertake.arrow_forwardInternational Foods Corporation, a U.S.-based food company, is considering expanding its soup-processing operations in Switzerland. The company plans a net investment of $6 million in the project. The current spot exchange rate is SF6.6 per dollar (SF = Swiss francs). Net cash flows for the expansion project are estimated to be SF3 million for 13 years and nothing thereafter. Based on its analysis of current conditions in Swiss capital markets, International Foods has determined that the applicable cost of capital for the project is 19 percent. Calculate the net present value of the proposed expansion project. Use Table IV to answer the questions below. Enter your answer in millions. For example, an answer of $1.20 million should be entered as 1.20, not 1,200,000. Round your answer to two decimal places.arrow_forward
- Savory Seafood Inc. is a U.S. firm that wants to expand its business internationally. It is considering potential projects in both Germany and Mexico, and the German project is expected to take six years, whereas the Mexican project is expected to take only three years. However, the firm plans to repeat the Mexican project after three years. These projects are mutually exclusive, so Savory Seafood Inc.’s CFO plans to use the replacement chain approach to analyze both projects. The expected cash flows for both projects follow: Project: German Year 0: –$1,120,000 Year 1: $370,000 Year 2: $390,000 Year 3: $420,000 Year 4: $330,000 Year 5: $220,000 Year 6: $95,000 Project: Mexican Year 0: –$520,000 Year 1: $275,000 Year 2: $280,000 Year 3: $295,000 If Savory Seafood Inc.’s cost of capital is 11%, what is the NPV of the German project? Assuming that the Mexican project’s cost and annual cash inflows do not change when the project is…arrow_forwardLexington Corp., a U.S. firm, currently has no existing business in New Zealand but is considering establishing a subsidiary there to serve the local market there. The following information has been gathered to assess this project.• The initial investment required is 25 million New Zealand dollars (NZ$).• The project will be terminated at the end of year 5, when the subsidiary will be sold. • The current spot rate of the New Zealand dollar is quoted as: USD/NZD = 0.6746 and for now it is assumed to remain constant until the end of the project. • The after-tax earnings of the subsidiary are estimated to be NZ$1,500,000; NZ$2,750,000; NZ$3,900,000; NZ$5,000,000 and NZ$6,250,000 at the end of years one, two, three, four, and five respectively.• The New Zealand government will impose a withholding tax of 15 percent on remitted earnings by the subsidiary.• All cash flows received by the subsidiary are to be sent to the parent at the end of each year. • The salvage value to be received is…arrow_forwardLexington Corp., a U.S. firm, currently has no existing business in New Zealand but is considering establishing a subsidiary there to serve the local market there. The following information has been gathered to assess this project.• The initial investment required is 25 million New Zealand dollars (NZ$).• The project will be terminated at the end of year 5, when the subsidiary will be sold. • The current spot rate of the New Zealand dollar is quoted as: USD/NZD = 0.6746 and for now it is assumed to remain constant until the end of the project. • The after-tax earnings of the subsidiary are estimated to be NZ$1,500,000; NZ$2,750,000; NZ$3,900,000; NZ$5,000,000 and NZ$6,250,000 at the end of years one, two, three, four, and five respectively.• The New Zealand government will impose a withholding tax of 15 percent on remitted earnings by the subsidiary.• All cash flows received by the subsidiary are to be sent to the parent at the end of each year. • The salvage value to be received is…arrow_forward
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