Background Information for Hi-Rider Inc

Hi-Rider, Inc., is considering the development of a subsidiary in Malaysia that would manufacture and sell motorized mountain bikes locally. The subsidiary would be wholly owned by the parent and created to enhance the value of the parent.

Hi-Riders financial managers have asked the manufacturing, marketing, and financial departments to provide them with relevant input so they can apply a capital budgeting analysis to this project. In addition, some Hi-Rider executives have met with government officials in Malaysia to discuss the proposed subsidiary.

The project would end in 3 years. All relevant information follows.

Initial investment: MYR 10 million (MYR = Malaysia ringgit)

Price and consumer demand:

Year 1: 2,000 units @ MYR 10,000/unit

Year 2: 3,000 units @ MYR 11,000/unit

Year 3: 4,000 units @ MYR 12,000/unit

Costs

Variable costs: Year 1 MYR 5,000/unit, Year 2 MYR 6,000/unit, Year 3 MYR 7,000/unit

Leasing office space: MYR 400,000 per year. Other Fixed costs: MYR 1.6 million per year

Malaysian government allows a maximum of MYR5 million in depreciation per year for plant and equipment. Hi-Rider plans to use the maximum allowed.

Tax laws: 25% income tax

Remitted funds: 10% withholding tax on remitted funds. Any amount can be remitted, and the funds remitted back to the US will not be taxed by the US government.

Exchange rates: Spot exchange rate of $4 for Malaysian ringgit ($0.25 for MYR1). Initially, Hi-Rider assume the exchange to be stable at this rate for the next three years.

Salvage values: MYR 8 million that can be sold to any local firm with any restrictions. One local firm willing to buy it from Hi-Rider at that time.

Required rate of return: 10%

I have complete most of the table below for you. Complete the rest of the table below and then answer the question 29. You must submit this table with your answers.

		YEAR 0	YEAR 1	YEAR 2	YEAR 3
1.	Demand		2,000	3,000	4,000
2.	Price per unit		MYR12,000	MYR13,000	MYR14,000
3.	Total revenue = (1) (2)		MYR24,000,000	MYR39,000,000	MYR56,000,000
4.	Variable cost per unit		MYR5,000	MYR6,000	MYR7,000
5.	Total variable cost = (1) (4)		MYR10,000,000	MYR18,000,000	MYR28,000,000
6.	Annual lease expense		MYR400,000	MYR400,000	MYR400,000
7.	Other fixed annual expenses		MYR1,600,000	MYR1,600,000	MYR1,600,000
8.	Noncash expense (depreciation)		MYR5,000,000	MYR5,000,000	MYR5,000,000
9.	Total expenses = (5) + (6) + (7) + (8)		MYR17,000,000	MYR25,000,000	MYR35,000,000
10.	Before-tax earnings of subsidiary = (3) (9)		MYR7,000,000	MYR14,000,000	MYR21,000,000
11.	Host government tax (20%)		MYR1,400,000	MYR2,800,000	MYR4,200,000
12.	After-tax earnings of subsidiary = (10) (11)		MYR5,600,000	MYR11,200,000	MYR16,800,000
13.	Net cash flow to subsidiary = (12) + (8)		MYR10,600,000	MYR16,200,000	MYR21,800,000
14.	MYR remitted by subsidiary (100% of net cash flow)		MYR10,600,000	MYR16,200,000	MYR21,800,000
15.	Withholding tax on remitted funds (10%)		MYR1,060,000	MYR1,620,000	MYR2,180,000
16.	MYR remitted after withholding tax = (14) (15)
17.	Salvage Value
18.	Exchange rate		0.25	0.25	0.25
19.	Cash flows to parent = [(16) + (17)] x (18)
20.	PV of parent cash flows (10 discount rate)
21.	Initial Investment by parent (convert to $) - 10M x 0.25
22.	Cumulative NPV

29. What is the NPV of this project? Pick the closest answer.

a. about $5,287,828.70

b. about $5,658,717.72

c. about $6,919,124.40

d. about S7,868,407.21

e. Do not undertake the project since NPV is negative