Chapter 14, Problem 27QA

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…