Mbonden City Plc is a manufacturer company of multimedia computer system based in Dar es Salaam.
In the multinational sense, companies try to create, transfer and preserve their competitive advantages abroad. Mbonden’s customers are all Tanzanian firms and majority of them purchase highly customized computer systems. Mbonden City Plc is considering whether to switch from domestic production to offshore production, possibly in Kenya.

Mr. Jaman Nyoni, the Chairman of Mbonden City’s board of directors believes that since the company has sound engineering and marketing capacity, shifting to offshore manufacturing will enable it to increase production as well as take full advantage of low-wage labour, cheaper materials, tax concessions, low interest on loans and government subsidies. The Chief Finance Officer has prepared a conversional discounted cash-flow statement, which indicated that switching to offshore production would give a positive Net Present Value (NPV) investment.
The board of directors has established that the Kenyan Government is willing to provide a loan of Kshs900 million at 9 percent fixed interest to Mbonden to allow it to build a factory there. The loan would be repaid in six annual-equal instalments. The projected annual income before tax from the proposed Kenya Plant is Kshs.9,000,000, beginning at the end of the first year. Kenya’s corporate tax (CT) rate is 25 percent and there is a 20 percent dividend withholding tax. However, Kenya will exempt the plant’s income from CT (but not the withholding tax) for the first six years. Mbonden plans to remit all income as dividends back to Tanzania where Tanzania Corporate Tax is 35 percent.
Another option being considered by Mbonden City Plc is to shut down all domestic production and arrange a manufacturing contract with a firm operating in Japan. However, the board of directors of Mbonden City Plc is concerned that the change from domestic to foreign operations could entail a loss of some intangible strategic benefits associated with domestic production.

Required:
Assume you work for FDI Consulting firm and you have been asked to advise the board of directors of Mbonden City Plc on their foreign investment strategy:

(i) Calculate the value of tax exemptions, which the Kenyan Government is willing to allow on the basis that Mbonden City Plc’s wish to remit all income as dividend back to Tanzania.
(ii) Calculate the before tax value of the interest subsidy, based on the information above, if the market interest rate for such an investment is 20 percent.
(iii) Comment on what you consider to be the key advantages and disadvantages for Mbonden City Plc if it were to shut down all domestic production and arrange a subcontract with a Japan based company, to manufacture all its production.

Answer rating: 100% (QA)

i To calculate the value of tax exemptions we need to consider the tax rates in both Kenya and Tanzania The Kenyan Government is willing to exempt the plants income from corporate tax CT for the first ... View the full answer