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Q.2 A multinational company is planning to set up a manufacturing plant in India involving an initial outlay of Rs. 40 million. The plant is
Q.2 A multinational company is planning to set up a manufacturing plant in India involving an initial outlay of Rs. 40 million. The plant is expected to have a useful life of 5 years and a salvage value of Rs. 8 million. The MNC follows SLM (Straight Line Method) of depreciation. To support additional level of activity, investment would require additional working capital of Rs. 4 million Since the cost of production is lower in India, the variable cost of production and sales would be lower, i.e. Rs. 20 per unit. Additional fixed cost per annum is estimated at Rs. 2 million. Further the forecasted selling price is lower i.e. Rs. 60 per unit to sell 500,000 units. The MNC is subjected to 40% tax rate and its cost of capital is 15% p.a. It is forecasted that Rupee will depreciate in relation to USD 3% p.a. after the first year, with an initial exchange rate of Rs. 40/$. The following assumptions have been made that US parent MNC has not been exporting to India and full repatriation every year with no (withholding taxes and full tax credit being available in USA. On the basis of above information, advice the MNC regarding the financial viability of the proposal
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