Question
Suppose that Kittle Co. is a U.S. based MNC that is considering setting up a subsidiary in Singapore. Kittle would like this subsidiary to produce
Suppose that Kittle Co. is a U.S. based MNC that is considering setting up a subsidiary in Singapore. Kittle would like this subsidiary to produce and sell guitars locally in Singapore, and needs assistance with capital budgeting. The duration of this project is four years, with an initial investment of S$20,000,000 (Singapore dollars).
Kittle Co. managers provide you key information regarding the project.
1. | The government in Singapore will tax any remitted earnings at a rate of 10.00%. |
2. | The subsidiary will remit all of its after-tax earnings back to the parent. |
3. | The forecasted exchange rate of the Singapore dollar over the four-year period is $0.50. |
4. | The salvage value is S$12,000,000, which will be paid by the Singapore government in exchange for ownership of the subsidiary after four years. |
5. | The required rate of return is 15.00%. |
Furthermore, no funds can be remitted from the subsidiary to the parent until the subsidiary is sold for the salvage value at the end of the project. In short, those funds are blocked. Until then, all funds from the subsidiary will be invested in securities that yield a 5.00% return net of taxes per year.
The following table shows a subsection of Kittles capital budgeting analysis.
Complete rows (14a)-(14c) of the table, filling in the amount of Singapore dollars remitted in year 4 for each of the cash flows from years 13. Then, complete row (14d), filling in the total S$ accumulated from investing these blocked funds. Next, complete row (15), filling in the amount of Singapore dollars withheld for taxes and the total after-tax Singapore dollars to be remitted to the parent in row (16). Then, calculate and enter the resulting U.S. dollar cash flows to the parent in row (19).
Note: Do not forget to account for the salvage value in row (19).
Year 1 Year 1 Year 2 Year 3 Year 0 Year 4 14. SS to be Remitted by Subsidiary S$4,400,000 $4,400,000 $10,800,000 S$10,000,000 SS 14a Year 1 Cash Flow Remitted in Year 4 @ 5.00% 14b. Year 2 Cash Flow Remitted in Year 4 @ 5.00% SS 140. Year 3 Cash Flow Remitted in Year 4 @ 5.0096 SS 140. Total Accumulated Funds over 4 years SS SS ss 15. Tax Withholding of Remitted Funds @ 10.0096 16. SS Remitted After Tex Withholdings 17. Salvage Value 18. Exchange Rate of SS S$12,000,000 $0.50 19. Cash Flows to Parent ((16) -(17] X (18) $ Year 1 Year 1 Year 2 Year 3 Year 0 Year 4 14. SS to be Remitted by Subsidiary S$4,400,000 $4,400,000 $10,800,000 S$10,000,000 SS 14a Year 1 Cash Flow Remitted in Year 4 @ 5.00% 14b. Year 2 Cash Flow Remitted in Year 4 @ 5.00% SS 140. Year 3 Cash Flow Remitted in Year 4 @ 5.0096 SS 140. Total Accumulated Funds over 4 years SS SS ss 15. Tax Withholding of Remitted Funds @ 10.0096 16. SS Remitted After Tex Withholdings 17. Salvage Value 18. Exchange Rate of SS S$12,000,000 $0.50 19. Cash Flows to Parent ((16) -(17] X (18) $Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started