50 Points

Martin, Inc., is considering the development of a subsidiary in Sydney, Australia that would manufacture and sell high quality guitars on the local Australian Market.

As one of Martin's financial managers, you have asked the finance, marketing and manufacturing departments to provide you with all of the relevant input so you can perform a capital budgeting analysis to determine whether to undertake this project or not.

In addition, a contingent of Martin executives have met with Australian government officials in Sydney to discuss the proposed subsidiary.

The project would end in 5 years. All of the relevant information that you need to perform this capital budgeting analysis follows here.

Initial investment: A$12,500,000 million (A$ = Australian dollars)

Price and consumer demand:

• Year 1 and 2: 20,000 units @ A$650/unit
• Year 3: 30,000 units @ A$760/unit
• Year 4: 40,000 units @ A$850/unit
• Year 5: 40,000 units @ A$880/unit

Costs

• Variable costs: Years 1 & 2 A$370/unit, Year 3 A$445/unit, Years 4 and 5 A$600/unit
• Fixed costs: A$2,000,000 per year ( A$1,000,000 lease and A$1,000,000 other fixed expense)

Depreciation A$1,000,000 per year

Tax laws: 30% income tax

Remitted funds: 15% withholding tax on remitted funds

Exchange rates: Spot exchange rate of $US 0.65 for Australian dollar

Salvage values: A$6 million

Required rate of return: 18%

Given all of the preceding information, using a spread sheet, show the year by year amounts that you have taken into consideration in your capital budget analysis and decide whether or not you will undertake this project.

Be sure to put your name on your work. Show your work; indicate your decision (do we do the project or not); and briefly explain that final decision!