Esmeralda, Inc., is considering the development of a subsidiary in Singapore that would manufacture and
sell baseball bats locally. Esmeralda’s financial managers have asked the manufacturing, marketing, and
financial departments to provide them with relevant input so they can apply a capital budgeting analysis
to this project. In addition, some Esmeralda executives have met with government officials in Singapore
to discuss the proposed subsidiary. The project would end in four years. All relevant information follows.

a. Initial investment. The project would require an initial investment of 20 million Singapore dollars
(S$), which includes funds to support working capital.
b. Price and consumer demand. The estimated price and demand schedules during each of the next
four years are shown in the Excel template.
c. Cost. The variable costs (for materials, labor, etc.) per unit have been estimated and consolidated
as shown in the Excel template.
d. Tax laws. The Singapore government will allow Esmeralda’s subsidiary to depreciate the cost of
the plant and equipment at a maximum rate of S$2 million per year, which is the rate the
subsidiary will use. The Singapore government will impose a 20 percent tax rate on income. In
addition, it will impose a 10 percent withholding tax on any funds remitted by subsidiary to the
parent. The U.S. government will allow a tax credit on taxes paid in Singapore; therefore,
earnings remitted to the U.S. parent will not be taxed by the U.S. government.
e. Remitted funds. The Esmeralda subsidiary plans to send all net cash flows received back to the
parent firm at the end of each year. The Singapore government promises no restrictions on the
cash flows to be sent back to the parent firm but does impose a 10 percent withholding tax on any
funds sent to the parent, as mentioned previously.
f. Exchange rates. The spot exchange rate of the Singapore dollar is $.74. Esmeralda currently uses
the spot rate as its forecast for all future periods.
g. Salvage value. The Singapore government will pay the parent S$12 million to assume ownership
of the subsidiary at the end of four years. Assume that there is no capital gains tax on the sale of
the subsidiary.
h. Required rate of return. Esmeralda, Inc., requires a 15 percent return on this project.


1. Base Case: Compute the NPV of the project based on projected cash flows to and from the parent.

2. Consideration of Exchange Rate Fluctuations: Esmeralda knows that the exchange rate will typically
change over time, but it does not know whether the Singapore dollar will strengthen or weaken in the
future.
A. Which would be preferred from the perspective of the parent company, appreciation or
depreciation of the Singapore dollar? Explain carefully?
B. Download the series of monthly exchange rates between the USD and Singapore dollar for the
last five years by following the steps below:
i. Go to finance.yahoo.com and search USD/SGD
ii. Click the Historical Data tab
iii. Choose Time period: 5Y and Frequency: Monthly, then click Apply tab.
iv. Download the data to Excel and keep the Date and Adj Close Columns

C. Perform trend analysis on the downloaded historical data to make the following projections
from the perspective of the U.S. parent:
i. What is your optimistic forecast of the exchange rate over each of the next five years?
Provide the numbers and explain how you arrive at this forecast.
ii. What is a pessimistic forecast of the exchange rate over each of the next five years?
Provide the numbers and explain how you arrive at this forecast.

Answer rating: 100% (QA)

Answer 1 Base Case Compute the NPV of the Project Based on Projected Cash Flows to and From the Parent The NPV of the project can be calculated using the following formula NPV CFt 1rt Where CFt is the ... View the full answer