Wolverine Corp. currently has no existing business in New Zealand but is conside
ID: 2749942 • Letter: W
Question
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 USD 50 million in NZDs (NZD). Given the existing spot rate of USD .50 per NZD, the initial investment in USDs is USD 25 million. In addition to the NZD 50 million initial investment for plant and equipment. Wolverine plans to finance the new investment by borrowing NZD 20 million from the local market. 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. So the annual interest expenses is fixed at NZD 2.8 million. Assume that the NZ subsidiary do not need any additional working capital.
The project will be terminated at the end of Year 3, when the subsidiary will be sold. Wolverine expects to receive NZD 52 million after subtracting capital gains taxes. Assume that this amount is not subject to a withholding tax.
The fixed costs, such as overhead expenses, are estimated to be NZD 6 million per year.
The exchange rate of the NZD is expected to be USD .52 at the end of Year 1, USD .54 at the end of Year 2, and USD .56 at the end of Year 3.
The New Zealand government will impose an income tax of 35 percent on income. The US corporate income tax is 30 %. Because Indian tax rate is greater than the US tax rate annual CFs repatriated to US will not be subject to additional taxes in the US.
All cash flows received by the subsidiary are to be sent to the parent at the end of each year. The subsidiary will use its working capital to support ongoing operations.
The plant and equipment are depreciated over 10 years using the straight?line depreciation method. Since the plant and equipment are initially valued at NZD 50 million, the annual depreciation expense is NZD 5 million.
Wolverine requires a 20 percent rate of return on this project.
Determine the net present value of this project. Should Wolverine accept this project?
The price, demand, and variable cost of the product in New Zealand are as follows: Variable Cost NZD 30 NZD 35 Year Price NZD 500 NZD 511 NZD 530 Demand 40,000 units 50,000 units 60,000 units NZD 40Explanation / Answer
Answer Cash flow chart
Subsidary sold in NZD after 3 years 52000000
Less Local Loan paid 20000000
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Amt recd in NZD $ 32000000
1 NZD = 0.56 USD after three years
Amount in USD 17920000
PVIF @ 20% 0.579 10375680
Total Present value of cash Inflow = 10375680+13340880 = 23716560
Less initial Investment = 25000000
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Net Present value of project -1283440
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NPV is negative, Hence project is not acceptable.
Particulars Year 1 Year 2 Year 3 Production 40000 50000 60000 Sales Price/unit 500 511 530 Revenue 20000000 25550000 31800000 Variable cost /unit 30 35 40 Variable cost 1200000 1750000 2400000 Gross profit 18800000 23800000 29400000 Less fixed cost 6000000 6000000 6000000 Depriciation 5000000 5000000 5000000 Interest 2800000 2800000 2800000 Net Profit 5000000 10000000 15600000 Exchange rate USD per NZD 0.52 0.54 0.56 Profit In USD 2600000 5400000 8736000 Tax @ 30% 780000 1620000 2620800 Net Earning 1820000 3780000 6115200 Add Dep reciation in USD 2600000 2700000 2800000 Total cash inflow 4420000 6480000 8915200 PVIF @ 20% 0.833 0.694 0.579 Present value of cash in flow 3681860 4497120 5161900 Total present value of cash inflow 13340880Related Questions
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