Build cash flow forecast table and submit your answers in an Excel file.

Wolverine Corp. currently has no existing business in New Zealand but is considering

establishing a subsidiary there. The following information has been gathered to assess this

project:

$$ The initial investment required is $$50$ million in New Zealand dollars $($NZ$$).$ Given the

existing spot rate of $$\mathrm{.}50$ per New Zealand dollar, the initial investment in U$.$S$.$ dollars is

$$25$ million. In addition to the NZ$$50$ million initial investment for plant and equipment,

NZ$$20$ million is needed for working capital and will be borrowed by the subsidiary from

a New Zealand bank. The New Zealand subsidiary will pay interest only on the loan

each year, at an interest rate of $14$ percent. The loan principal is to be paid in $10$ years.

$$ The project will be terminated at the end of Year $3,$ when the subsidiary will be sold.

$$ The price, demand, and variable cost of the product in New Zealand are as follows:

Year Price Demand Variable Cost

$1$ NZ$$50040,000$ units NZ$$30$

$2$ NZ$$51150,000$ units NZ$$35$

$3$ NZ$$53060,000$ units NZ$$40$

$$ The fixed costs, such as overhead expenses, are estimated to be NZ$$6$ million per year.

$$ The exchange rate of the New Zealand dollar is expected to be $$\mathrm{.}52$ at the end of Year $1,$

$$\mathrm{.}54$ at the end of Year $2,$ and $$\mathrm{.}56$ at the end of Year $3.$

$$ The New Zealand government will impose an income tax of $30$ percent on income. In

addition, it will impose a withholding tax of $10$ percent on earnings remitted by the

subsidiary. The U$.$S$.$ government will allow a tax credit on the remitted earnings and will

not impose any additional taxes.

$$ All cash flows received by the subsidiary are to be sent to the parent at the end of each

year. The subsidiary will use its working capital to support ongoing operations.

$$ The plant and equipment are depreciated over $10$ years using the straight$-$line

depreciation method. Since the plant and equipment are initially valued at NZ$$50$

million, the annual depreciation expense is NZ$$5$ million.

$$ In three years, the subsidiary is to be sold. Wolverine plans to let the acquiring firm

assume the existing New Zealand loan. The working capital will not be liquidated but

will be used by the acquiring firm when it sells the subsidiary. Wolverine expects to

receive NZ$$52$ million after subtracting capital gains taxes. Assume that this amount is

not subject to a withholding tax.

$$ Wolverine requires a $20$ percent rate of return on this project.

a$.$ Determine the net present value of this project. Should Wolverine accept this project?

b$.$ Assume exchange rate will depreciate year over year with a normally distributed

probability, mean of $4\%$ and standard deviation of $1\%.$ Simulate $500$ NPV numbers and

calculate the average NPV$.$