Tutorial - Chapter 6 petal Budgeting Analysis Woline County s existing business in New Zealand considering establishing a subsidiary there. The following information has been gathered to assess this project: The initial investment required is 50 million in New Zealand dollar (NZS). Given the existing spot rate of $.50 per New Zealand dollar the initial investment in US dollars is $25 million. In addition to the NZ$50 million initial investment for plant and equipment, NZ$20 million is needed for working capital and will be borrowed by the subsidian from a New Zealand bank. The New Zealand subsidiary will pay interestely on the loan cach year, at an interest rate of 14 percent. The loan principal is to be paid in 10 years The project will be terminated at the end of Year 1 when the subsidiary will be sold The price, demand, and variable cost of the product in New Zealand are as follows: Year Price NZS500 NZS511 NZ$530 Demand 40.000 units 50.000 units 60,000 units Variable Cost NZ$30 NZS35 NZS40 The fixed costs, such as overhead expenses, are estimated to be NZ56 million per year. The exchange rate of the New Zealand dollar is expected to be 5.52 at the end of Year 1. 5.54 at the end of Year 2, and S.56 at the end of Year 3. The New Zealand government will impose an income tax of 30 percent on income. In addition, it will impose a withholding tax of 10 percent on earnings remitted by the subsidiary. The U.S. government will allow a tax credit on the remitted earnings and will not impose any additional taxes All cash flows received by the subsidiary are to be sent to the parent at the end of each year. The subsidiary will use its working capital to support ongoing operations The plant and equipment are depreciated over 10 years using the straight-line depreciation method. Since the plant and equipment are initially valued at NZS50 million, the annual depreciation expense is NZS5 million In three years, the subsidiary is to be sold. Wolverine plans to let the acquiring firm assume the existing New Zealand loan. The working capital will not be liquidated but will be used by the acquiring firm when it sells the subsidiary. Wolverine expects to receive NZS52 million after subtracting capital gains taxes. Assume that this amount is not subject to a withholding tax. Wolverine requires a 20 percent rate of return on this project. Determine the net present value of this project. Should Wolverine accept this project