Question: Suppose that Kittle Co . is a U . S . based MNC that is considering setting up a subsidiary in Singapore. Kittle would like
Suppose that Kittle Co is a US based MNC that is considering setting up a subsidiary in Singapore. Kittle would like this subsidiary to produce and sell guitars locally in Singapore, and needs assistance with capital budgeting. The duration of this project is four years, with an initial investment of S$Singapore dollars
Kittle Co managers provide you key information regarding the project.
The government in Singapore will tax any remitted earnings at a rate of
The subsidiary will remit all of its aftertax earnings back to the parent.
The forecasted exchange rate of the Singapore dollar over the fouryear period is $
The salvage value is S$ which will be paid by the Singapore government in exchange for ownership of the subsidiary after four years.
The required rate of return is
Furthermore, no funds can be remitted from the subsidiary to the parent until the subsidiary is sold for the salvage value at the end of the project. In short, those funds are blocked. Until then, all funds from the subsidiary will be invested in securities that yield a return net of taxes per year.
The following table shows a subsection of Kittles capital budgeting analysis.
Complete rows ac of the table, filling in the amount of Singapore dollars remitted in year for each of the cash flows from years Then, complete row d filling in the total S$ accumulated from investing these blocked funds. Next, complete row filling in the amount of Singapore dollars withheld for taxes and the total aftertax Singapore dollars to be remitted to the parent in row Then, calculate and enter the resulting US dollar cash flows to the parent in row
Note: Do not forget to account for the salvage value in row Note: Do not forget to account for the salvage value in row
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