8. Capital Budgeting: Two managers of Marshall, Inc. want to explore an opportunity to establish a subsidiary in Jamaica. They have a new technology they currently own, a patent that expires in 3 years, the conversion process of recycled plastic and rubber materials to rubber socks. The rubber socks can be used when walking and doing water activities on beaches and water parks. Jamaica has a lucrative tourism market with millions of local and international beach goers in need of rubber socks. Marshall, Ine. has marketed these socks as Aqua socks and want to start a business in Jamaica called Aqua Socks Limited. The patented technology includes a machine that converts the recycled materials to the final product at a low cost per unit. One of the managers, Frank, has researched the costs and estimated the demand shown below in Jamaican dollars and believes, high demand and a high salvage rate of JM\$24,000, will result in maximizing shareholder wealth. The other manager, Serena, is however concerned about the implications of the exchange rate of Jamaican dollars to US dollars and would rather invest in a country with an equal exchange that also has a lucrative tourism market. Revenue Initial investment: USS 34,000 Price and consumer demand: Year 1:13,250 units @ JMS400.00/unit Year 2: 14,750 units @ JMS400.00/unit Year 3:25,500 units@JMS400.00/unit Costs Variable costs: JMSO .20/unit year 1, JMS0.30/unit year 2, and JMS0.50/unit year 3 Annual Fixed costs: JMS1,000 per year Other Annual Fixed costs: JMS 100 Depreciation: JMS200,00 Tax laws: 2% corporate income tax Remitted funds: 1% withholding tax on remitted funds Exchange rates: Spot exchange nate of $0.0067 for Jamaican dollar Salvage values: JMS24.000 thousand Required rate of return: 12% 1. Using the information provided above and the table below, calculate the cumulative net present value (NPV) of the project over 3 years in Jamaica. (a) Will the project add to shareholder wealth or should they pursue the project in another host country? \begin{tabular}{|l|l|l|l|l|l|} \hline & & Year 1 & Year 2 & Year 3 \\ \hline 1. & Demand & & & \\ \hline 2. & Price per umit & & & \\ \hline 3. & Total revenue =(1)(2) & & & \\ \hline 4. & Variable cost per unit & & & \\ \hline 5. & Total varible cost =(1)(4) & & \\ \hline 6. & Annual Fixed Cost & & & \\ \hline 7. & Other fixed ammual expenses & & & \\ \hline 8. & Noncash expense ( depreciation ) & & & \\ \hline 9. & Total expenses =(5)+(6)+(7)+(8) & & & \\ \hline \end{tabular} \begin{tabular}{|l|l|l|l|l|l|l|l|} \hline & & Year 1 & & Year 2 & & Year 3 \\ \hline 17. & Salvage value & & & & \\ \hline 18. & Exchange rate of JMS & & & & \\ \hline 19. & Cash flows to parent =[(16)+(17)](18) & & & & \\ \hline 20. & PV of parent cash flows (12% discount tate ) & & & & & \\ \hline 21. & Initial investment by parent & & & & & \\ \hline 22. & Cumulative NP V & & & & \\ \hline \end{tabular}