Hollender Company is a South-African based manufacturer of kitchen furniture. The companys senior management have believed for

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Hollender Company is a South-African based manufacturer of kitchen furniture. The company’s senior management have believed for several years that there is little opportunity to increase sales in the domestic market and wish to set up a manufacturing subsidiary in Tanzania. Because of high transportation costs, exporting from South Africa is not financially viable.The Tanzania subsidiary would involve the construction of a new factory in Dar Es Salaam. The projected costs are shown below:

	Now TZS ‘000’	Year 1 TZS’000’
Land	23,000	-
Building	16,000	62,000
Machinery	-	64,000
Initial Investment in Working Capital	15,000	-

Production and sales in year two are estimated to be 2,000 kitchens at an average price of TZS200,000 (at current prices). Production and sales in each of years 3-5 is forecastat 2,500 units.Total local variable costs in Tanzania in year two are expected to be TZS110,000 per unit(at current prices). No tax allowable depreciation exists on fixed assets. All prices and costs in Tanzania are expected to increase annually by the current rate of inflation. The after tax realizable value of the investment in five years’ time is expected to be approximately TZS162 million at price levels then ruling. Inflation for each of the next six years are expected to be:

SA 3%

TANZANIA 5%

The cost of capital for the company is 10%. The spot exchange rate is TZS50/SAR. Corporate tax in Tanzania is 30%, in SA 40%. Taxation is payable, and allowances are available, one year in arrears. The government of Tanzania is anxious to encourage foreign investment and thus allows overseas investors to repatriate an annual cash dividend equal to that year’s after tax accounting profit. Cash remitted to SA from the subsidiary is not taxable in South Africa.