Capital Budgeting Analysis.After three years successful operation in Mexico, your company is considering to expand your ESL business to other non-U.S. countries where there is an increase demand in the business world where business people want to learn American English for conducting business negotiations, draft/review commercial contracts and business agreements, as well as marketing online for a big surge in cross-border e-commerce. From John'slast year trip to East Asia, China, South Korea and Japan, he is considering China and ask you to do financial feasibility analysis and report to the board meeting for discussion. You did some research on China, you found that China is not ranked on the top for its business environment perhttp://www.doingbusiness.org/rankingsbut its economy growth posts on the top of list per the market potential rankinghttps://globaledge.msu.edu/mpi/data/2020, especially so for the post Covit-19 era per I..H@WEO/OEMDC/ADVEC/WEOWORLD.After your research you gathered following information to assess this project. Your recent qualitative PEST (Political/legal, Economic/financial, Social/cultural, and Technologic analysis) analysis was well received by the board, you were asked to conduct a quantitative financial feasibility analysis (capital budgeting) for the board new initiative.

• The initial investment required is 8 million in Chinese Yuan (RMB). Given the existing spot rate of $.15 per RMB, the initial investment in U.S. dollars is $1.2 million. In addition to the initial investment for building the language lab, $0.5 million is needed for working capital and will be borrowed by the subsidiary from a local Chinese bank. The Chinese subsidiary will pay interest on the loan each year, at an interest rate of 5% which is approximately RMB 166,700 per year. The loan principal is to be paid in the 10thyears.
• Assume the project be terminated at the end of Year 5, when the subsidiary will be sold.
• The tuition price (4 weeks module), demand (one student per module = one unit), and variable cost of the service in China are as follows: 6 weeks course module RMB 1800 per student. Tuition price & variable cost increase at 6% a year due to inflation and demand increases at 7.5% after year one with GDP growth projection of the country.
  

\f1. Determine the net present value of this project. Should ELS accept this project? Also graph NPV & CNPV against years and mark the breakeven year point on the graph Year 0 Year Year Year Year Year Question 1 1 2 3 4 5 Subsidiary perspective 1 Demand in unit 2 Price per unit 3 Total revenue=(1)x(2) 4 5 Variable cost per unit 6 Total variable cost=(1)x(5) 7 Interest payment on RMB loan 8 Fixed cost 9 Depreciation 10 Total expenses=(6)+(7)+(8)+(9) 11 12 Subsidiary earning before tax=(3)-(10) 13 Host government tax 20% 14 Subsidiary earning after tax=(12)-(13) 15 Subsidiary net cashflow=(14)+(9) 16 RMB remitted by subsidiary =100% of (15) 17 Host government withholding tax 15% RMB remitted after withholding tax = (16)- 18 (17) 19 Salvage value 20 Parent perspective 21 Exchange rate US$ price per RMB $0.15 Cash flow to parent in US$=[(18)+(19)]x(21) 22 (FV= future value) PV of Parent cash inflow (20% discount rate) 23 (PV=present value) =(22)-(1+0.2)^year i 24 Initial investment in US$ $1,200,000 Cumulative NPV of cashflows 25 (CNPV=Cumulative net present value)5. Based on the original financing proposal stated in question one, if there is 50%-50% percent chance for each of these two scenarios below, what will be your project NPV respectively? Is the salvage value critical to the project under each scenario? Probability Inflation Exchange Rate Scenario Demand Scenario % change per year % per year o per year against USD 50% 2 4 10 50% 10 -4 -5 Note: Please use Excel work sheet to answer your questions. One question for each spread sheet. Bookl - Excel (R O X File Home Insert Page Layout Formulas Data Review View ( Tell me what you want to do. He, Xiachong Prof. . Share M26 . I X V fx G H Question 2 P Q R Year Year 0 Subsidiary perspective Year 1 Year 2 Year 10 6 1 Demand 7 2 Price per unit 3 Total revenue=(1)x(2) 4 10 5 Variable cost per unit 6 Total variable cost=(1)x(5) Please insert your written 11 12 *Less saving from production of 30,000 units answer for each question inside 13 7 Interest (+principal at the end) payment on MYR loan 14 8 Fixed cost a text box. 15 9 Depreciation 16 10 Total expenses=(6)+(7)+(8)+(9) 17 1 18 12 Subsidiary earning before tax=(3)-(10) 19 13 Host government tax 30%%=(12)x0.3 20 14 Subsidiary earning after tax=(12)-(13) 21 15 Subsidiary net cashflow=(14)+(9) 22 23 6 Remitted by subsidiary =100% of (15) 24 17 Host government withholding tax 10% 25 18 Subsidary remitted after withholding tax=(16)-(17) 26 19 Salvage value 27 28 20 Parent perspective 21 Exchange rate US$ price per MYR SO.25 30 22 Cash flow to parent in US$ [(18)+(19)]x(21) 31 23 PV of Parent cash inflow @ 20% 24 Initial investment in US$ 25 Cumulative NPV of cashflows -$25,000,000 Please use Excel work sheet to answer your question. About one worksheet per one or two questions. Refer to worksheet tab Q2, Q3, ....below. Q2 Q3 Q4 / Q5 + Ready 100% Q U W SX EN 0 : . . 17 0 4 0 258 PM 1/6/2018