Required a. Calculate the NPV of the project and advice the management on taking up this project or reject the project. You should justify your suggestion using appropriate calculations. (30 marks) b. Discuss the advantages and disadvantages getting foreign direct investment (FDI) form overseas investors. (10 marks) (Total 40 marks for section C) (End of the Paper) Section C (40 marks) SCENARIO 3. Flix Ltd is a US-based company manufacturing and selling safety equipment in the US market. ABC Lid exports safety equipment to Singapore. Currently, ABC Lid has no existing business in Singapore but is considering establishing a subsidiary there. The initial investment required is 40 million in Singapore dollars (SS). Given the existing spot rate of $0.5 per Singapore dollar, the initial investment in U.S. dollars is S 20 million. In addition to the SS 40 million initial investment for plant and equipment, S$10 million is needed for working capital and will be borrowed by the subsidiary from a Singapore bank. The Singapore subsidiary will pay interest only on the loan each year, at an interest rate of 8 per cent. The loan principal is to be paid in 5 years. In three years, the subsidiary is to be sold. Flix Ltd will transfer the Singapore loan during the sales. The working capital will not be liquidated but will be used by the acquiring firm when it sells the subsidiary. Flix Ltd expects to receive S$28 million after subtracting capital gains taxes. Assume that this amount is not subject to a withholding tax. The project will be terminated at the end of Year 3 when the subsidiary will be sold. The selling price of the product is 400 SS, the expected demand 50.000 units in year 1, and variable cost of the product is SS 125. The demand for the product expected to increase by 10% every year (Year 2 and year 3). The fixed costs, such as overhead expenses, are estimated to be SS1,000,000 per year and assume it will not change. The exchange rate of the Singapore dollar is expected to be $0.5 and will not change. The Singapore government will impose an income tax of 20% per cent on income. In addition, it will impose a withholding tax of 8% per cent on earnings remitted by the subsidiary. The U.S. 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 plant and equipment are depreciated over 3 years using the straight-line depreciation method. Cost of the plant and machines was S$40,000,000 and salvage value is S$28,000,000. Flix Ltd requires an 8 % per cent rate of return on this project. Required a. Calculate the NPV of the project and advice the management on taking up this project or reject the project. You should justify your suggestion using appropriate calculations. (30 marks) b. Discuss the advantages and disadvantages getting foreign direct investment (FDI) form overseas investors. (10 marks) (Total 40 marks for section C) (End of the Paper) Section C (40 marks) SCENARIO 3. Flix Ltd is a US-based company manufacturing and selling safety equipment in the US market. ABC Lid exports safety equipment to Singapore. Currently, ABC Lid has no existing business in Singapore but is considering establishing a subsidiary there. The initial investment required is 40 million in Singapore dollars (SS). Given the existing spot rate of $0.5 per Singapore dollar, the initial investment in U.S. dollars is S 20 million. In addition to the SS 40 million initial investment for plant and equipment, S$10 million is needed for working capital and will be borrowed by the subsidiary from a Singapore bank. The Singapore subsidiary will pay interest only on the loan each year, at an interest rate of 8 per cent. The loan principal is to be paid in 5 years. In three years, the subsidiary is to be sold. Flix Ltd will transfer the Singapore loan during the sales. The working capital will not be liquidated but will be used by the acquiring firm when it sells the subsidiary. Flix Ltd expects to receive S$28 million after subtracting capital gains taxes. Assume that this amount is not subject to a withholding tax. The project will be terminated at the end of Year 3 when the subsidiary will be sold. The selling price of the product is 400 SS, the expected demand 50.000 units in year 1, and variable cost of the product is SS 125. The demand for the product expected to increase by 10% every year (Year 2 and year 3). The fixed costs, such as overhead expenses, are estimated to be SS1,000,000 per year and assume it will not change. The exchange rate of the Singapore dollar is expected to be $0.5 and will not change. The Singapore government will impose an income tax of 20% per cent on income. In addition, it will impose a withholding tax of 8% per cent on earnings remitted by the subsidiary. The U.S. 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 plant and equipment are depreciated over 3 years using the straight-line depreciation method. Cost of the plant and machines was S$40,000,000 and salvage value is S$28,000,000. Flix Ltd requires an 8 % per cent rate of return on this project
