Fleximetals Inc. of Canada is considering a capital investment in Zamboana. The currency of Zamboana is the Zamboa peso (symbol: Zp). Details regarding the project are provided below (all currency amounts are reported in the nearest thousands).
• Initial project cost (in 2008). $3,500 (Zp7000) for plant and equipment and $250 (Zp500) for working capital.
• Sales. First year = Zp13,000. It is expected to grow at 10% per annum over the next 3 years.
• Costs. Variable costs will be 30% of sales, and fixed cash costs are Zp 1,000 per year.
• Working capital. Gross working capital (that is, cash, receivables and inventory) = 20% of sales.
• Half financed by local accruals and accounts payable, but other half financed externally.
• Depreciation. Straight-line over three years. No salvage value.
• Taxes. Income taxes are 30% in both Zamboana and Canada.
• Liquidation values (after 3 years). Zp5,000 (free of all Zamboana and Canadian taxes).
• Weighted average cost of capital (WACC). The WACC used in Zamboana and Canada for projects of this type is 18%.
• Exchange rare in 2008. Zp/$ is 2.0 and is expected to increase by 10% in each subsequent year.
Assume that 50% of the project's net income after taxes are remitted to the Canadian parent company as dividend.
a. Compute the net present value of the project from the point of view of the affiliate in Zamboana as well as the parent in Canada.
b. Is the project acceptable under both circumstances? If not, briefly comment on factors to be considered in the decision process.