suppose that Kittle Co, is a U.S. based MNC that is considering setting up a subsidiary in Singapore. Kitle would like this subdiary 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). Additionally, Kittle Co. managers provide you with more information needed to estimate the total after tax Singapore dollars that will be remitted back to the parent. In particular, four key insights are shared by Kittle managers. 1. The government in Singapore will tax the earnings of the subsidiary at a rate of 20.00%. 2. The government in Singapore will tax any remitted earnings at a rate of 10.00% 3. The government in Singapore will allow the subsidiary to depreciate the subsidiary's plant and equipment by up to S$2,000,000.00 per year. 4. The subsidiary will remit all of it's after-tax earnings back to the parent. The following table, in rows (10)-(15), shows how these factors influence the capital budgeting analysis. Year O 11 Year 3 100,000 5300 S$ 36,000,000 1. Demand 2.Price per Unit 3. Total Revenue 4. Variable Cost Per Unit 5. Total Variable Cost 6. Annual Lease Expense 7. Other Fored Annual Expense 8. Noncash Expense (Depreciation) 9. Total Expense 10. Before-Tex Earnings of Subsidiary (3)-(9) 11. Host Government Tax 20.00% 12. After Tax Earnings of Subsidiary (10) - (11) 13. Net Cash Flow to Subsidiary (12) + Year: 60,000 units 5$350 S$21,000,000 S$200 S$12,000,000 S$1,000,000 S$1,000,000 5$2,000,000.00 S$ 16,000,000 S$5,000,000 Year 2 60,000 units S$150 S$21,000,000 55200 S$12,000,000 S$1,000,000 S$1,000,000 S$2,000,000.00 S$16,000,000 S$5,000,000 5 525,000,000 S$1,000,000 S$1,000,000 552,000,000.00 S$29,000,000 S$7,000,000 5 5 S$1,000,000 S$4,000,000 551,000,000 S$4,000,000 5$1,400,000 S$5.600.000 5 S$6,000,000 5$6,000,000 S$7.600.000 5 (8) 5$6,000,000 S5600,000 S$5,000,000 S$600,000 $$7,600,000 5$750,000 14. S$ Remitted by Subsidiary 15. Tax Withholding of Remitted Funds @ 10.00% 16. S$ Remitted After Tax Withholdings Year 0 Year 4 100,000 r Unit Year 1 60,000 units S$350 S$21,000,000 S$200 S$12,000,000 S$1,000,000 S$1,000,000 S$2,000,000.00 S$ 16,000,000 S$5,000,000 pense ual Expense e (Depreciation) Year 2 60,000 units S$350 S$21,000,000 S$200 S$12,000,000 5$1,000,000 S$1,000,000 S$2,000,000.00 S$16,000,000 S$5,000,000 Year 3 100,000 units S$360 S$ 36,000,000 S$250 S$25,000,000 S$1,000,000 S$1,000,000 S$2,000,000.00 S$29,000,000 5$7,000,000 $3,000,000 5260 S$26,000,000 5$1,000,000 5$1,000,000 5$2,000,000.00 S$30,000,000 $$8,000,000 nings of Subsidiary ant Tax @20.00% S$1,000,000 5$1,000,000 5$1,400,000 S$5,600,000 551,600,000 5$6,400,000 ngs of Subsidiary S$4,000,000 S$4,000,000 to Subsidiary (12) + S$6,000,000 S$6,000,000 5$7,500,000 $$8,400,000 Subsidiary g of Remitted Funds S$6,000,000 S$600,000 S$6,000,000 S$600,000 557,600,000 S$760,000 S$8.400,000 55840,000 ter Tax Withholdings
