1. Vigorous Corporation presently has no existing business in Singapore but is considering the establishment of a subsidiary there. The following information has been gathered to assess the project. a) The initial investment required is SGD50 million. Given the current spot rate of RM2.50 per Singapore dollar, the initial investment, SGD20 million is needed for working capital and will be borrowed by the subsidiary from a Singapore bank. The subsidiary of Vigorous Corporation will pay interest only on the loan each year, at an annual rate of 14 percent. The loan principal is to be paid in 10 years. b) The project will be terminated at the end of year 3 , when the subsidiary will be sold. c) The price, demand and variable cost of the product in Singapore are as follows: d) Fixed costs, such as overhead expenses are estimated to be SGD6 million per year. e) The exchange rate of the Singapore dollar is expected to be RM2.52 at the end of Year 1, RM2.54 at end of Year 2 and RM2.56 at the end of Year 3. f) The Singapore government will impose an income tax of 30 percent on income. In addition, it will impose a withholding tax of 10 percent as earnings remitted by the subsidiary. The Malaysian government will allow a tax credit on remitted earnings and will not impose any additional taxes. g) 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 on-going operations. h) The plant and equipment are depreciated over 10 years using the straight-line depreciation method. The initial cost of the plant and equipment are valued at RM 5 million. i) In three years, the subsidiary is to be sold. Vigorous Corporation intends to let the acquiring firm assume the existing Singapore loan. The working capital will not be liquidated but will be used by the acquiring firm. Vigorous Corporation expects to receive SGD52 million after subtracting capital gains taxes when it sells the subsidiary. j) A 20 percent rate of return is required on this project. Based on the above information, determine the net present value of this project and decide whether this project should be accepted. Deciding on the required rate of return or cost of capital is quite complicated for international projects. (20 marks)