show your workings

QUESTION ONE ABC Ltd is a Kenyan multinational company with a subsidiary in Uganda. The Ugandan subsidiary has an opportunity to invest in a project costing Ush 750M. The parent company will contribute Ush 450M. The subsidiary will use Ush.150M from its Retained Earnings and Ush 150M from a 10% local loan. The subsidiary will have to import some inputs from the parent company resulting in a contribution of Ush. 75M per annum. The project will result in operating savings (Before depreciation and taxes) of Ush. 300M per annum in real terms. The projects salvage value at the end of 5 years will be Ush 75M. If the project is undertaken, the parent company will suffer from diseconomies of scale amounting to Ush. 15M p.a. The appropriate nominal discount rate is 15% and the corporate tax rate in Ugandan is 30%. The company uses straight line depreciation method and the following exchange rates are expected. Spot Ush 20/ksh End of 1 st year Ush 24/ksh End of 2 nd year Ush 25/ksh End of year 3 rd year Ush 25/Ksh End of 4 th year Ush 27/ksh End of 5 th year Ush 30/ksh The inflation rate in Uganda is expected to be 5% during the project life. Assume that the net operating cash flows from the project are paid as dividends to the parent company at the end of each year. Required Advice the company on whether to undertake the investment (20 marks)