ABC Ltd$,$ a Kenyan firm own a subsidiary in Blueland. The subsidiary has an investment opportunity, which

will cost $40$ million Blues $($Blues $($B$)$ is the currency of Blueland$).$ ABC plans to invest directly B$20$ million

while the subsidiary will use B$10$ million of its retained earnings and B$10$ million of locally borrowed funds

at $10\%$ interest. The project will generate revenue of B$7\mathrm{.}5$ million in real terms annually for the next five

years. The subsidiary will import components from ABC Ltd worth B$2$ million per year, but ABC ltd will

suffer diseconomies of scale to the extent of B$1$ million annually due to shifting production to the host

country.

The salvage value at the end of five years is estimated to be B$1\mathrm{.}5$ million while the inflation rate in Blueland

is estimated at $5\%$ per year while the inflation rate in Kenya is estimated at $10\%.$ ABC ltd uses CAPM to

estimate the appropriate discount rate. The risk free rate is expected to be $10\%,$ the expected market return,

$15\%$ and the beta, $0\mathrm{.}8.$ The spot exchange rate is B $1\mathrm{.}5$ per KSh$\mathrm{.}1$ while the corporate tax rate in Blueland is

$30\%.$ Assume that the subsidiary uses straight$-$line depreciation method, profit repatriation is blocked for

first two years and PPP holds.

Required:

Using the NPV method, advice ABC Ltd on whether to undertake the project