1. Stein Inc. is planning to establish a subsidiary in Australia to manufacture and sell sports equipment locally. It will need an initial investment of 5 million U.S. dollars (US$) to set up the manufacturing facility. The project will end in 3 years and then the parent company will be paid A$7 million for transferring ownership to the Australian government. The salvage value is net of tax and will not be subject to withholding tax. The company estimates the net cash flows after tax will be A$7,000,000, A$8,000,000 and A$9,000,000 at the end of the first, second and third year, respectively. The parent's required rate of return for the Australian project is 18%. The Australian government imposes 15% withholding tax on remitted funds and only allows earnings remittance from the Australian subsidiary at the end of the third year. Suppose that the subsidiary can invest at 10% p.a. in Australia throughout the project duration and that the exchange rate for the Australian dollar would remain at $0.62 throughout the project duration, what is the NPV of this project? You can assume that the U.S. government does not charge tax for the A$ income.
2. Stein Inc. is planning to establish a subsidiary in Australia to manufacture and sell cars locally. It will need an initial investment of 15 million U.S. dollars (US$) to set up the manufacturing facility. The project will end in 3 years and then the parent company will be paid A$5 million for transferring ownership of the Australian subsidiary to the Australian government. The payment from the Australian government is net of tax and is not subject to the withholding tax. After paying for income and withholding taxes, the subsidiary is expected to remit A$7 million, A$8 million, and A$9 million at the end of year 1, 2, and 3, respectively. Stein Inc. assumes that the future spot rate of the Australian dollar will stay the same at $1.3 over the next three years. The company decides to hedge 80% of the remitted net cash flows (excluding the salvage value) using forward contracts at the rate of US$1.2/A$ for the next three years. If the company's required rate of return is 12%, what is the NPV in US$ of this project? You can assume that the U.S. government does not charge tax for the A$ income.
3. Jabreakit Inc. is a dairy manufacturer in the United States and currently exports US$2 million worth of dairy products to Australia every year. Jabreakit Inc. is planning to establish a subsidiary in Australia which will have a lower production cost and the products will be sold directly in Australia. For this reason, Jabreakit Inc. will need to shut down its export business and the production lines in the United States. The Australian subsidiary is expected to remit US$3.5 million net cash flows to its parent in the first year. The remitted net cash flows will continue to grow by 20% every year compared to its previous year. You can assume that the U.S. government does not charge tax for the A$ income. The parent company will require an initial investment of US$3 million to set up the subsidiary and the project will end in 3 years. The required rate of return of the parent company is 17%. What is the NPV in US$ of the Australian project?