Mustafa Trading, a Singaporean multinational Company, ships pre-packaged

spices to Hong Kong, the United Kingdom, and the United States, where they are

resold by sales affiliates. Mustafa Trading is assessing the possibility to make a

foreign capital investment in Morocco: the name of the project is SpiceCasablanca.

The initial cost of the project is MAD 1 billion. The annual cash flows over the five-year

economic life of the project in MAD are estimated to be 300million, 400million, 500

million, 600 million, and 700 million, respectively. The parent firms cost of capital in

Singaporean Dollars is 10%. Long-run inflation is forecasted to be 3% per annum in

the Singapore and 7% in Morocco. The current spot foreign exchange rate is SGD =

MAD 9.500.

To fund the project, SpiceCasablanca, Mustafa Trading decides to borrow from

the international bond market. The CEO, Mr David Chong, of Mustafa Trading thinks

borrowing in dollar would be advantageous for the company. Therefore, Mustafa

Trading considers to raise USD100 million in the United States in dollar through foreign

bonds, that is, Yankee Bond at a borrowing rate of 7%. However, Mustafa Tradings

CFO, Mr Tim Lee, does not agree with the CEOs assessment on raising funds through

Yankee Bonds. He argues that raising the same amount in dollar (i.e., $100 million)

through Eurobonds in the UK would involve less regulatory stringency and possibly at

a cheaper borrowing rate than 7%.

Mustafa Trading as the parent company engages in numerous intrafirm

transactions with its affiliates. Since the outbreak of COVID-19, Mustafa Trading has

been concerned about the funds that it has in its Hong Kong affiliate. Therefore,

Mustafa Trading decided that it should re-examine its transfer pricing policy with its

Hong Kong affiliate as a mean of repositioning funds from Hong Kong to Singapore.

The corporation tax rate in Hong Kong is 16.5% whereas it is 17% in Singapore. At

present, Mustafa Trading charges Hong Kong affiliate a transfer price of $100 for a

Box of Spices. Since transfer pricing is a well-known method for tax avoidance or fund

repositioning, Hong Kong tax authority is vigilant on tackling such incidences

Question

Calculate the NPV of the project in SGD (Singaporean Dollar). Should this

project be accepted?