Referring to the information provided in problem 2, evaluate the following:

a. How would a 30 percent ad valorem tariff on power train and chassis imposed by the Vietnam government impact Kubota’s decision?

b. How would an 8 percent annual rate of inflation in Vietnam but no devaluation of the VND against the ¥ impact Kubota’s decision?

c. How would a 30 percent corporate income tax imposed by Vietnam impact Kubota’s decision?

d. How would a 10 percent withholding tax on all cash remittances by Kubota-

Vietnam to its parent impact Kubota’s decision?

e. How would a composite scenario based on assumptions a through d change Kubota’s decision?

Data from problem 2

Kubota—the Japanese manufacturer of tractors and small earthmoving equipment—is considering building an assembly plant in Da Nang (Vietnam). The initial investment would amount to dong (VND)
200 billion (US$10 million) and would be financed partly (50 percent) by a loan from the Vietcong Bank in VND at the subsidized rate of 6 percent over five years with bullet principal repayment at the end of year 5 and partly (30 percent)
by a revolver from Mitsubishi-Tokyo Bank at TIBOR + 120 basis points.
The balance of the initial investment is in the form of equity provided by Kubota-
Japan.
Output is planned at 5,000 small bulldozers per year. Sale price is VND 200 million/unit. Power train and chassis would be imported from Japan for VND 100 million cif/unit. Locally sourced parts and labor cost amount to VND 75 million/unit.
Kubota-Vietnam is granted a corporate income tax holiday and will pay a 5 percent royalty to its Japanese parent. Kubota estimates that the project will displace 750 units that are currently exported directly from Japan to Vietnam.
Export sales have a profit margin of 15 percent.
Assume that VND 20,000 = ¥100 over the life of the project and that the TIBOR floating rate revolver can be swapped in a five-year fixed-rate loan paying 3. 5 percent.