. 2. Sigmund Company (U.S) manufactures high end snow skis and is a MNC that is considering locating a subsidiary in New Zealand under the following conditions: The initial investment is NZ$50 million which will be used for plant and equipment. The current value of the New Zealand dollar (NZ$) is $.50. Along with the initial investment an additional NZ$20 million is needed in working capital The working capital can be borrowed in New Zealand at a local bank at 14% interest. Payments of interest only are due annually; the full principal is due in 10 years. The project will be terminated in three years when the subsidiary is sold. The following price, demand, and variable cost of the product: Year Price Demand Units Variable Cost NZ$500 40,000 NZ$30 2 NZ$511 50,000 NZ$35 3 NZ$ 530 60,000 NZ$40 . 1 . Fixed costs are NZ$6 million per year. The exchange rate for the New Zealand dollar is expected to be $.52 at the end of year 1, $54 at the end of year 2 and $.56 at the end of year 3 The New Zealand govemment imposes income tax of 30% on net income and additionally imposes a withholding tax of 10% on earnings remitted by subsidiaries to parent companies located outside of New Zealand. The U.S. government credits taxes paid abroad and will not impose any additional taxes. All cash flows received by the subsidiary will be transferred to the at the end of each year. The subsidiary will use its own working capital. The plant and equipment are depreciated over a 10 year straight line basis. Sigmund has entered into an agreement to sell the subsidiary in 3 years to a local competitor for an after tax amount of NZ$52 million (all taxes induded). Under the sale agreement, the new buyer will assume the working capital loan. Sigmund requires a 20% return on this proiect . Required: a) Prepare a table showing the relevant cash-flows and calculate the NPV of the project. b) As an alternative to a), assume Sigmund is considering investing an additional $10 million to cover the working capital so the subsidiary does not have to borrow these funds. If this approach is used the selling price is anticipated to be NZ$18 million higher. What is the new NPV under thuis a better alternative. c) Which approach a) or b) is more sensitive to fluctuation in exchange rates? Explain? d) Assume New Zealand blocks the movement of funds to the parent company until the subsidiary is sold. Assume funds may be invested to earn an after tax return of 6%. Using alternative a) what is the new NPV and how is it affected? c) What is the break-even salvage value of this project if Sigmund uses alternative a) and funds are not blocked? 1) Assume a New Zealand firm agrees to purchase the subsidiary after 1 year for $27 million (after tax) and assume the working capital 1. If all cash-flows remain unchanged from alternative a) would Sigmund benefit by accepting the offer to sell the subsidiary? (use text box for answers and work support) This problem worth 35 pts . 2. Sigmund Company (U.S) manufactures high end snow skis and is a MNC that is considering locating a subsidiary in New Zealand under the following conditions: The initial investment is NZ$50 million which will be used for plant and equipment. The current value of the New Zealand dollar (NZ$) is $.50. Along with the initial investment an additional NZ$20 million is needed in working capital The working capital can be borrowed in New Zealand at a local bank at 14% interest. Payments of interest only are due annually; the full principal is due in 10 years. The project will be terminated in three years when the subsidiary is sold. The following price, demand, and variable cost of the product: Year Price Demand Units Variable Cost NZ$500 40,000 NZ$30 2 NZ$511 50,000 NZ$35 3 NZ$ 530 60,000 NZ$40 . 1 . Fixed costs are NZ$6 million per year. The exchange rate for the New Zealand dollar is expected to be $.52 at the end of year 1, $54 at the end of year 2 and $.56 at the end of year 3 The New Zealand govemment imposes income tax of 30% on net income and additionally imposes a withholding tax of 10% on earnings remitted by subsidiaries to parent companies located outside of New Zealand. The U.S. government credits taxes paid abroad and will not impose any additional taxes. All cash flows received by the subsidiary will be transferred to the at the end of each year. The subsidiary will use its own working capital. The plant and equipment are depreciated over a 10 year straight line basis. Sigmund has entered into an agreement to sell the subsidiary in 3 years to a local competitor for an after tax amount of NZ$52 million (all taxes induded). Under the sale agreement, the new buyer will assume the working capital loan. Sigmund requires a 20% return on this proiect . Required: a) Prepare a table showing the relevant cash-flows and calculate the NPV of the project. b) As an alternative to a), assume Sigmund is considering investing an additional $10 million to cover the working capital so the subsidiary does not have to borrow these funds. If this approach is used the selling price is anticipated to be NZ$18 million higher. What is the new NPV under thuis a better alternative. c) Which approach a) or b) is more sensitive to fluctuation in exchange rates? Explain? d) Assume New Zealand blocks the movement of funds to the parent company until the subsidiary is sold. Assume funds may be invested to earn an after tax return of 6%. Using alternative a) what is the new NPV and how is it affected? c) What is the break-even salvage value of this project if Sigmund uses alternative a) and funds are not blocked? 1) Assume a New Zealand firm agrees to purchase the subsidiary after 1 year for $27 million (after tax) and assume the working capital 1. If all cash-flows remain unchanged from alternative a) would Sigmund benefit by accepting the offer to sell the subsidiary? (use text box for answers and work support) This problem worth 35 pts