Rom-10 A TEE WY21 AaBbcede AaBbccde AaBbCel AaBbcc AaB be X, * A A. 1 Normal I No Spaci... 11 Heading 1 Heading 2 Title Font Paragraph Styles 3. . Just in Time Ltd a US based company and currently has no existing business in New Zealand but is consider ing establishing a subsidiary there. The following information has been gathered to assess this project: The initial investment required is $30 million in New Zealand dollars (NZS). Given the existing spot rate of $0.65 per New Zealand dollar, the initial investment in U.S. dollars is $19.5 million. In addition to the NZ$10 million initial investment for plant and equipment, NZ$5 million is needed for working capital and will be borrowed by the subsidiary from a New Zealand bank. The New Zealand subsidiary will pay interest only on the loan each year, at an interest rate of 6 per cent. The loan principal is to be paid in 10 years. The project will be terminated at the end of Year 3 when the subsidiary will be sold. The price, demand, and variable cost of the product in New Zealand are as follows: Year Price Demand Variable Cost 1 NZ$350 78,000 units NZS55 2 NZ$360 80,000 units NZ$65 3 NZ$370 82,000 units NZ$75 The fixed costs, such as overhead expenses, are estimated to be NZ$2,500,000 per year. The exchange rate of the New Zealand dollar is expected to be 5.67 at the end of Year 1,5.69 at the end of Year 2, and $ 70 at the end of Year 3. The New Zealand goverment will impose an income tax of 30% per cent on income. In addition, it will impose a withholding tax of 15 per cent on eamings remitted by the subsidiary. The U.S. government will allow a tax credit on the remitted eamings and will not impose any additional taxes. All cath 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. Since the plant and equipment are initially valued at NZ$10 million, the annual depreciation expense is NZS2 million In three years, the subsidiary is to be sold. Just in Time Limited plans to let the acquiring firm assume the existing New Zealand loan The working capital will not be liquidated but will be used by the acquiring fim when it sells the subsidiary. Just in Time Limited expects to receive NZS12 million after subtracting capital gains taxes. Assume that this amount is not subject to a withholding tax . . . . English (UK) Rom-10 A TEE WY21 AaBbcede AaBbccde AaBbCel AaBbcc AaB be X, * A A. 1 Normal I No Spaci... 11 Heading 1 Heading 2 Title Font Paragraph Styles 3. . Just in Time Ltd a US based company and currently has no existing business in New Zealand but is consider ing establishing a subsidiary there. The following information has been gathered to assess this project: The initial investment required is $30 million in New Zealand dollars (NZS). Given the existing spot rate of $0.65 per New Zealand dollar, the initial investment in U.S. dollars is $19.5 million. In addition to the NZ$10 million initial investment for plant and equipment, NZ$5 million is needed for working capital and will be borrowed by the subsidiary from a New Zealand bank. The New Zealand subsidiary will pay interest only on the loan each year, at an interest rate of 6 per cent. The loan principal is to be paid in 10 years. The project will be terminated at the end of Year 3 when the subsidiary will be sold. The price, demand, and variable cost of the product in New Zealand are as follows: Year Price Demand Variable Cost 1 NZ$350 78,000 units NZS55 2 NZ$360 80,000 units NZ$65 3 NZ$370 82,000 units NZ$75 The fixed costs, such as overhead expenses, are estimated to be NZ$2,500,000 per year. The exchange rate of the New Zealand dollar is expected to be 5.67 at the end of Year 1,5.69 at the end of Year 2, and $ 70 at the end of Year 3. The New Zealand goverment will impose an income tax of 30% per cent on income. In addition, it will impose a withholding tax of 15 per cent on eamings remitted by the subsidiary. The U.S. government will allow a tax credit on the remitted eamings and will not impose any additional taxes. All cath 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. Since the plant and equipment are initially valued at NZ$10 million, the annual depreciation expense is NZS2 million In three years, the subsidiary is to be sold. Just in Time Limited plans to let the acquiring firm assume the existing New Zealand loan The working capital will not be liquidated but will be used by the acquiring fim when it sells the subsidiary. Just in Time Limited expects to receive NZS12 million after subtracting capital gains taxes. Assume that this amount is not subject to a withholding tax . . . . English (UK)
