Log in
Finance
1
answer
0
watching
625
views

1. An MNC is considering establishing a two‑year project in New Zealand with a $30 million initial investment. The firm’s cost of capital is .12%. The required rate of return on this project is 18%. The project is expected to generate cash flows of NZ$12M in Year 1 and NZ$30M in Year 2, excluding the salvage value. Assume no taxes, and a stable exchange rate of $0.60 per NZ$ over the next two years. All cash flows are remitted to the parent. What is the break-even salvage value?

Watch
1
answer
0
watching
625
views

For unlimited access to Homework Help, a Homework+ subscription is required.

Avatar image
Liked by doananhthu1006
Irving Heathcote
Irving HeathcoteLv2
28 Sep 2019

Unlock all answers

Get 1 free homework help answer.
Already have an account? Log in
Share

Related questions

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

1 NZ$500 40,000 units NZ$30

2 NZ$511 50,000 units NZ$35

3 NZ$530 60,000 units NZ$40

The fixed costs, such as overhead expenses, are estimated to be NZ$6 million per year.

The exchange rate of the New Zealand dollar is expected to be $.52 at the end of Year 1, $.54 at the end of Year 2, and $.56 at the end of Year 3.

The New Zealand government will impose an income tax of 30 percent on income. In addition, it will impose a withholding tax of 10 percent on earnings remitted by the subsidiary. The U.S. government will allow a tax credit on the remitted earnings and will not impose any additional taxes.

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 NZ$50 million, the annual depreciation expense is NZ$5 million.

In three years, the subsidiary is to be sold. Wolverine plans to let the acquiring firm assume the existing New Zealand loan. The working capital will not be liquidated but will be used by the acquiring firm when it sells the subsidiary. Wolverine expects to receive NZ$52 million after subtracting capital gains taxes. Assume that this amount is not subject to a withholding tax.

Wolverine requires a 20 percent rate of return on this project.

Determine the NPV, PI, IRR, MIRR and payback of this project. Should Wolverine accept this project?

Note:

International Capital Budgeting is 95% similar to the evaluation of domestic projects which you have done so far except for three differences:

Interest expense is considered in international capital budgeting, so it should be deducted.

Tax Withholding is additional tax imposed to funds remitted to the parent. This is deducted from the Operating Cash Flows (OCF).

All computations should be done in terms of the foreign current. The exchange rate should be applied to the Free Cash Flows (FCF) at the end to convert the foreign currency to US dollars.

Part 1: Your firm is an MNC headquartered in the United States. You have been tasked with estimating the weighted average cost of capital (WACC) given the following information:

• Firm’s bond yield: 8%

• Treasury rate: 3% • Beta: 1.5

• Expected market return: 11%

• Target Capital Structure: 30% debt, 70% equity

• Tax bracket: 35%

Part 2:

Texas Co. (TC) established a subsidiary in Russia two years ago. Under its original plans, TC intended to operate the subsidiary for a total of four years. Exchange forecasts suggest the ruble will likely depreciated from the current level of $0.033 to $0.028 to $0.025 over the next few years.TC could sell the subsidiary today for 5 million rubles to a potential acquirer. If TC continues to operate the subsidiary, it will generate cash flows of 3.5 million rubles next year and 4.5 million rubles in the following year. These cash flows would be remitted back to the parent in the U.S. The required rate of return of the project is 15 percent.

Should TC continue operating the Russian subsidiary?

(Calculating free cash flows) Vandelay Industries is considering a new project with a 4-year life with the following cost and revenue data. This project will require an investment of $140,000 in new equipment. This new equipment will be depreciated down to zero over 4 years using the simplified straight-line method and has no salvage value. This new project will generate additional sales revenue of $112,000 while additional operating costs, excluding depreciation, will be $68,000. Vandelay's marginal tax rate is 35 percent. What is the project's free cash flow in year 1?

Please help by writing out formulas so I can better understand how to set up the equations for future problems. Thank you for your help.

Weekly leaderboard

Home
Homework Help 3,900,000
Finance 370,000
Start filling in the gaps now
Log in