Suppose that Kittle Co. is a US 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). Finally, Kittle managers have provided you with key data to estimate the net present value of the project. In particular, four key inghts are shared by Kittle managers. 1. The forecasted exchange rate of the Singapore dollar over the four-year period is $0.50 2. 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. 3. The required rate of return is 15.00% The following table, in rows (17)-(21), shows how these factors influence the capital budgeting analysis Complete row 22 of the table, Filling in the cumulative net present value in each of the four years rashion to the parent se rounded to the nearest dollar use these rounded values when calculating raw (227 whese factors influence the capital budgeting analysis Complete row of the table, Alling in the cumulative net present value in each of the four years Note: The discounted values cash flows to the parent are rounded to the nearest dollar. Use these rounded values when calculating row (22) Year o Year 1 Year 2 Year 1. Demand 60,000 units 60,000 units 100,000 units 2.Price per Unit S$350 56350 56360 3. Total Revenue 5621,000,000 S$21,000,000 5$36,000,000 4. Variable Cost Per Unit 55200 S5200 5$250 5. Total Variable Cost S$12,000,000 $$12,000,000 5$25,000,000 6. Annual Lease Expense 551,000,000 551,000,000 5$1,000,000 7. Other Fixed Annual Expense S$1,000,000 5$1,000,000 S$1,000,000 8. Noncash Expense (Depreciation) S$2,000,000.00 5$2,000,000.00 5$2,000,000.00 9. Total Expense S516,000,000 5516,000,000 5529,000,000 10. Before-Tex Earnings of Subsidiary 555,000,000 S55,000,000 S$7.000.000 13)-(9) 351.000.000 $$1,000,000 11. Host Government Tax 20.00% 551,400,000 S$4,000,000 5$4,000,000 12. After-Tax Earnings of Subsidiary 555,500,000 1 S$ 16,000,000 5$5,000,000 S$16,000,000 S$5,000,000 S$29,000,000 5$7,000,000 10. Before Tax 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) + S$1,000,000 S$4,000,000 S$1,000,000 $$4,000,000 S$1,400,000 S$5,600,000 S$6,000,000 S$6,000,000 S$7,600,000 5$6,000,000 5$600,000 5$6,000,000 5$600,000 557,600,000 $$760,000 S$5,400,000 S55,400,000 556,840,000 14. 5$ Remitted by Subsidiary 15. Tax withholding of Remitted Funds 10.00% 16. S$ Remitted Alter-Tax Withholdings 17. Salvage Value 18. Exchange Rate of 55 19. Cash Flows to Parent (16) +(17)] X(18) 20. PV of Parent Cash Flows 15.00% 21. Initial U.S. $ Investment by Parent 22. Cumulative NPV $0.50 $2,700,000 50.50 $2.700,000 $0.50 53.420,000 52,347,826 $2,041,568 52.248,705 $10.000.000 100,000 units 5$300 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 60,000 units S$350 S$21,000,000 S$200 S$12.000.000 S$1,000,000 S$1,000,000 5$2,000,000.00 SS16,000,000 S$5,000,000 100,000 units S$360 S$36,000,000 S$250 S$25,000,000 S$1.000.000 S$1,000,000 $$2,000,000.00 S$29,000,000 5$7.000.000 ense S$30,000,000 S$260 S$26,000,000 5$1,000,000 5$1,000,000 S$2.000.000,00 550.000.000 S$8,000,000 reciation) Subsidiary S$5,000,000 20.00% Subsidiary S$1,000,000 554,000,000 S$1.000.000 S$4,000,000 551.400.000 5$5.500,000 5$1,600,000 556,400.000 lidiary (12) + S$6,000,000 S56.000.000 557.600.000 S$8.400,000 S$6,000,000 Siary mitted Funds 556,000,000 5$600,000 S57,600.000 S5760.000 S58,400,000 S$840,000 S5600.000 Withholdings 555,400,000 S$5,400,000 S56.840.000 557,560,000 S$12.000.000 50.50 $9.780.000 $0.50 52.700.000 50.50 $2.700.000 50.50 53,420.000 (15) +(17)] $2.347.826 $2,041.588 52.248.706 $5.591.747 v 15.00% int by Parent $10.000.000
