Multinational Company A currently has no business in New Zealand but is considering setting up a subsidiary there. The following information is considered when evaluating this project:

The initial investment of the project is $50 million NZ, with a productot rate of $0.5/$NZ. In addition, the project also needs an additional working capital of NZ$2 million. With this amount, the subsidiary can agree to borrow a New Zealand bank loan. The New Zealand subsidiary will pay interest on the loan at an interest rate of 14%. Principal will be paid in 10 years.

• The project will close at the end of year 3 with the sale of the subsidiary The selling price, demand and variable costs of the product in New Zealand are as follows:

Price: NZ$520

Demand: 45,000 products

Variable Fee: NZ$30

Fixed costs NZ$6 million and other fixed costs NZ$2.8 million. The rate of NZ$ is projected to be $0.52 at the end of year 1; $0.54 end of year 2; $0.56 year-end 3

• The New Zealand government imposes a 30% income tax on earnings. In addition, there is a tax on profits repatriated 10%. The US government allows tax deductions on profits repatriated and does not impose any additional taxes • All cash flows received by the subsidiary will be remitted to the parent company at the end of each year. Subsidiary will use working capital to provide for upcoming operations

Plant and equipment are depreciated using the straight-line method over 10 years. After 3 years, the subsidiary was sold. Multinational Company A intends to leave the existing loan-receiving acquirer in New Zealand. Working capital is not recovered but continues to be used by the acquiring company. Multinational Company A is expected to receive NZ$52 million from the sale of its subsidiary (excluding tax on capital gains). Assume that this is not subject to repatriation tax.

Multinational company A requires a rate of return on this project of 20%.

 1. Make a parameter table; equipment depreciation; loan repayment; profit and loss report; project cash flows.

2. Determine the project's NPV and IRR. Should multinational company A choose this project?

3. Determine the change of the project's NPV and IRR in the following cases:

a. Let the selling price change from NZ$450 to NZ$550 with a jump of NZ$5.

b. For demand varying from 30,000 PRODUCTS to 70,000 PRODUCTS with a jump of 5,000 PRODUCTS

c. For fee plates that vary from NZ$20 to NZ$50 with a hop of NZ$5

d. Let the selling price change from NZ$450 to NZ$550 with a jump of NZ$5 and the demand to change from 30,000 PRODUCTS to 70,000 PRODUCTS with a jump of 5,000 PRODUCT

e. Let demand change from 30,000 PRODUCTS to 70,000 PRODUCTS with a jump of 5,000 PRODUCTS and variable cost from NZ$20 to NZ$50 with a jump of NZ$5

f. Let the selling price change from NZ$450 to NZ$550 with a jump of NZ$5 and the variable cost from NZ$20 to NZ$50 with a jump of NZ$5 4. As historical data shows, the input seas change as after:

Selling price, best case, worst case and expectation: NZ$700; NZ$300; NZ$500 Consumption, Best Case, Worst Case and Expectations: $100,000 PRODUCTS; 30,000 PRODUCTS; 70,000 US PRODUCTS

• Variable cost, best case, worst case and expectation: NZ$20; NZ$50; NZ$30 • Proportion of subsidiary cash flow to be transferred to parent company, best, worst case and expectation: 100%; 40%; 80%

Determine the project's NPV and IRR when the above situations occur.

5. Supposedly multinational company A is also considering a financing arrangement in which the parent company invests $10 million in working capital needs so that the subsidiary avoids a NZ$2 million loan from the bank. New Zealand. Using the method on the subsidiary selling price (excluding tax on capital gains) is expected to be higher than NZ$18 million. Is the above funding arrangement more viable for the parent company than the original agreement? Explain ? 6. Would the NPV of this project be more sensitive to exchange rate fluctuations in the case of a New Zealand borrowing subsidiary or in the case of an equity investment by the parent company to finance working capital? Explain?

7. Assume that multinational company A uses the original financing arrangement and the capital cannot be repatriated until the company is sold. The capital that is not repatriated will be reinvested at 6% interest rate (after tax) until the end of year 3. How will the NPV of the project be affected?

8. Assume that multinational company A decides to take on the project and use the original financing agreement. Also assume that after one year a New Zealand company offers a subsidiary purchase price of $27 million (after tax) and forecasts the information for years 2 and 3 unchanged. Should multinational company A sell its subsidiary? Why?

Answer rating: 100% (QA)

solution 1Parameter Table Year 0 Year 1 Year 2 Year 3 Initial Investment 50 million NZ 0 0 0 Working Capital 2 million NZ 2 million NZ 2 million NZ 2 million NZ Interest Rate 14 14 14 Price NZ520 NZ52... View the full answer