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 some individuals may want to learn American style English. From John's recent trip to East Asia, China, South Korea and Japan, he is considering China and ask you to do a financial feasibility analysis and report to the board meeting for discussion. You did some research on China, you found that China is not favorably ranked on its business environment per http://www.doingbusiness.org/rankings but its economy grow still posts good growth rate per another market potential ranking gathered following information to assess this project. Your recent qualitative PEST (Political/legal, Economic/financial, Social/cultural, and Technologic analysis) analysis has well received by the board, you were asked to conduct a quantitative financial feasibility analysis to support financial (capital budgeting) feasibility analysis lobaledge.msu.edu/mpi. After your research you The initial investment required is 8 million in Chinese Yuan (RMB). Given the existing spot rate of S.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, S0.5 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 10 years th Assume the project be terminated at the end of Year 5, when the subsidiary will be sold. . one unit), and variable cost of the service The tuition price (6 weeks module), demand (one student per module 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 percent higher with GDP growth projection of the country Price RMB 1800 (1800 x1.06) Demand 4,000 units (4,000x1.075) Variable Cost Per Unit RMB 150 (150x1.06) Year 4 The fixed costs, such as overhead expenses, are estimated to be RMB 400,000 per year The exchange rate of RMB is expected to be S0.13 at the end of Year 1, S.14 at the end of Year 2 & 3, and 0.18 for year 4 and 5. Although China's currency is peg to a basket of currencies, it fluctuation range has increased recently. For the education sector, the government will impose an income tax of 20%. In addition, it will impose a withholding tax of 15% on earnings remitted by a foreign company operated in the education sector. The US 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 language lab equipment are depreciated over 10 years using the straight line depreciation method. Since the initially investment is RMB 8 million, the annual depreciation expense is RMB 0.8 million. Assume in five years, the subsidiary is to be sold. You company plans to let the acquiring firm assume the existing RMB loan. The working capital will not be liquidated but will be used by the acquiring firm when it sells the subsidiary. Your company expects to sell the subsidiary for RMB 12 million after subtracting capital gains taxes Assume that this amount is not subject to a withholding tax. . Your board demands ELS China a required rate of 20% return on this project after considering the risk. 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 some individuals may want to learn American style English. From John's recent trip to East Asia, China, South Korea and Japan, he is considering China and ask you to do a financial feasibility analysis and report to the board meeting for discussion. You did some research on China, you found that China is not favorably ranked on its business environment per http://www.doingbusiness.org/rankings but its economy grow still posts good growth rate per another market potential ranking gathered following information to assess this project. Your recent qualitative PEST (Political/legal, Economic/financial, Social/cultural, and Technologic analysis) analysis has well received by the board, you were asked to conduct a quantitative financial feasibility analysis to support financial (capital budgeting) feasibility analysis lobaledge.msu.edu/mpi. After your research you The initial investment required is 8 million in Chinese Yuan (RMB). Given the existing spot rate of S.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, S0.5 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 10 years th Assume the project be terminated at the end of Year 5, when the subsidiary will be sold. . one unit), and variable cost of the service The tuition price (6 weeks module), demand (one student per module 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 percent higher with GDP growth projection of the country Price RMB 1800 (1800 x1.06) Demand 4,000 units (4,000x1.075) Variable Cost Per Unit RMB 150 (150x1.06) Year 4 The fixed costs, such as overhead expenses, are estimated to be RMB 400,000 per year The exchange rate of RMB is expected to be S0.13 at the end of Year 1, S.14 at the end of Year 2 & 3, and 0.18 for year 4 and 5. Although China's currency is peg to a basket of currencies, it fluctuation range has increased recently. For the education sector, the government will impose an income tax of 20%. In addition, it will impose a withholding tax of 15% on earnings remitted by a foreign company operated in the education sector. The US 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 language lab equipment are depreciated over 10 years using the straight line depreciation method. Since the initially investment is RMB 8 million, the annual depreciation expense is RMB 0.8 million. Assume in five years, the subsidiary is to be sold. You company plans to let the acquiring firm assume the existing RMB loan. The working capital will not be liquidated but will be used by the acquiring firm when it sells the subsidiary. Your company expects to sell the subsidiary for RMB 12 million after subtracting capital gains taxes Assume that this amount is not subject to a withholding tax. . Your board demands ELS China a required rate of 20% return on this project after considering the risk.