Question 4 (25 Marks) Tenrac Inc., a U.S based MNC is considering the development of a subsidiary in Singapore that would manufacture and sell tennis rackets locally. Tenrac's management has asked various departments to supply relevant information for a capital budgeting analysis. In addition, some Tenrac executives have met with government officials in Singapore to discuss the proposed subsidiary. The following information is relevant: Initial investment: An estimated 40 million Singapore dollars (S$), which includes funds to support working capital, would be needed for the project. Project life: The project is expected to end in four years. The host government of Singapore has promised to purchase the plant from the parent after four years. Price, demand and variable costs: The estimated price, demand and variable costs are as follows: Examiner: Dr. E. Sarpong-Kumankoma Page 2 of 3 Year Variable Costs Per Racket Price Per Racket Demand In Singapore 1 S$ 400 S$ 700 90,000 units 2 S$ 400 S$ 700 90,000 units 3 S$ 500 S$ 720 150,000 units 4 S$ 520 S$ 760 150,000 units Other Costs: The expense of leasing extra office space is S$ 2 million per year. Other annual overhead expenses are expected to be S$ 2 million per year. Exchange rates: The spot exchange rate of the Singapore dollar is $.50. Tenrac uses the spot rate as its best forecast of the exchange rate that will exist in future periods. Host government taxes on income earned by subsidiary: The Singapore government will allow Tenrac Inc. to establish the subsidiary and will impose a 20% tax rate on income. In addition, it will impose a 10% withholding tax on any funds remitted by the subsidiary to the parent. U.S government taxes on income earned by Tenrac subsidiary: The U.S government will allow a tax credit on taxes paid in Singapore; therefore, earnings remitted to the U.S parent will not be taxed by the U.S government. Cash flows from Tenrac subsidiary to parent: The Tenrac subsidiary plans to send all net cash flows received back to the parent firm at the end of each year. The Singapore government promises no restrictions on the cash flows to be sent back to the parent firm but imposes a 10% withholding tax on any funds remitted as mentioned above. Depreciation: The Singapore government will allow Tenrac's subsidiary to depreciate the cost of the plant and equipment at a maximum rate of S$ 4 million per year, which is the rate the subsidiary would use. Salvage value: The Singapore government will pay the parent S$24 million to assume ownership of the subsidiary at the end of the four years. Assume there is no capital gains tax on the sale of the subsidiary. Required rate of return: Tenrac Inc. requires a 15% return on this project. REQUIRED: Determine the Net Present Value (NPV) of this project. Should Tenrac accept this project? Examiner: Dr. E. Sarpong-Kumankoma Page 3 of 3