A US based MNC, Genuflow Ltd, is considering establishing

a three-year project in Canada with a US$70 million initial

investment. The firm's cost of capital is 10%. The required

rate of return on this project is 13%. The firm is projected to

generate cash flows of C$38 million in Years 1 and 2 and

C$58 million in Year 3, and is expected to have a salvage

value of C$30mlion.

MNC must pay a 10% tax on remitted funds, and the stable

exchange rate is C$1.27 per US$ (i.e. US$1 = $01.27) over

the next two years and a rate of C$1.31 per US$

li.e

US$=C$ 1.31) in vear 3.

All cash flows are remitted to the parent at the end of each

year.

Required:

i What is the amount of US dollars that will be remitted to

the parent company each vear? Hint: use the after tax

cash flows.

lil) Calculate the Net Present Value of the project. (Hint - find

NPV of the after tax cash flows)

(18 marks)

lil Explain whether or not the MC should accept the

project?

(3 marks )

Genuflow Ltd. conducted its capital budgeting analysis

in July. However, in December the management expects

the leadership of the government to stabilize and

improvements in the political conditions in Canada. How

should the discount rate and the feasibility of the project be

affected by the improvements in the country's political

conditions?