Wolverine Corp. currently has no existing business in New Zealand but is considering to establish a subsidiary there. The following information has been gathered to assess this project:

1) The initial investment required is NZ$50 million. Given the existing spot rate of C$0.5 per NZ$, the initial investment is C$25 million. In addition to this NZ$50 million for plant and equipment, NZ$20 million is needed for working capital and will be borrowed by the subsidiary from a New Zealand bank.

2) The project will be terminated at the end of Year 3, when the subsidiary will be sold.

3) The price, demand, and variable cost of the product in New Zealand are as follows: Year Price Demand Variable Cost 1 NZ$500 40,000 units NZ$30 2 NZ$511 50,000 units NZ$35 3 NZ$530 60,000 units NZ$40

4) The fixed costs, such as overhead expenses, are estimated to be NZ$6 million per year. The exchange rate of the NZ$ is expected to be C$0.52 at the end of Year 1, C$0.54 at the end of Year 2, and C$0.56 at the end of Year 3.

5) The New Zealand government will impose an income tax of 30% on income. In addition, it will impose a withholding tax of 10% on earnings remitted by the subsidiary. The Canadian federal government will allow a tax credit on the remitted earnings and will not impose any additional taxes.

6) All cash flows received by the subsidiary are to be sent to the parent at the end of each year.

7) The plant and equipment are depreciated over 10 years using the straight-line depreciation method. Since the plant and equipment are initially valued at NZ$50 million, the annual depreciation expense is NZ$5 million.

8) In 3 years, the subsidiary is to be sold. Wolverine expects to receive NZ$52 million after subtracting capital gains taxes. Assume that this amount is not subject to a withholding tax. 9) Wolverine requires a 20% rate of return on this project.

Required:

a) Evaluate this project from both the project's and the parent's view. Should Wolverine accept this project?

b) Assume that Wolverine is also considering an alternative financing arrangement in which the parent would invest an additional C$10 million to cover the working capital requirements. Is this alternative financing arrangement more feasible for the parent than the original proposal?

c) Assume Wolverine used the original financing proposal and that funds are reinvested at a rate of 6% (after tax) until the end of Year 3. How is your evaluation affected?