Question
Palo Alto Electronics (PAE) of the US exports 90,000 units of computer parts per year to Argentina. it sells them for the equivalent of $60
Palo Alto Electronics (PAE) of the US exports 90,000 units of computer parts per year to Argentina. it sells them for the equivalent of $60 per unit. Total current cost is $48 per set.
PAE is studying the possibility of establishing a subsidiary in Argentina to reproduce and sell the parts locally. Sales volume and price would not be affected.
The cost of plant and equipment would be $3,000,000. Plant and equipment will be fully depreciated to book value off zero on a straight line basis for two years. Their Market Salvage value is estimates at $900,000 at the end of year two. The net working capital needs are 1,200,000 . The level of NWC will not change in the interim period. The subsidiary would import all its raw materials from the parent at a cost of $14 per set. Additional local costs for the subsidiary are $6 per set . PAE's pre -tax profit margin on the $14 sale is $7. The tax rate for U.S. and argentina is 40% . The WACC for PAE and its subsidiary is 15%
What is the one year net free cash flow from the perspective of the subsidiary ?
a) $2,160,000
b) $2,760,000
c) $2,544,000
d) $3,660,000
How much is the total initial cash flow for this project (subsidiary) ?
a) $3,000,000
b) $2,100,000
c) $1,800,000
d) $4,200,000
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