Suppose that Sherman Co., a U.S.-based MNC is considering a plan to establish a subsidiary in Singapore. The MNC would establish the subsidiary using an upfront investment of $10,000,000 and would sell the subsidiary after four years. While it is confident in the values of certain parameters of the capital budgeting analysis, there is some substantial risk in the tax rate on earnings remitted from Singapore as well as the salvage value. In particular, Sherman believes that there are two possible tax rates with the following probabilities. Possible Tax Rate Outcome Probability of Outcome 10.00% 70.00% 20.00% 30.00% 100% Additionally, Sherman believes that there are two possible salvage values with the following probabilities. Probability of Outcome Possible Salvage Value Outcome $12,000,000 60.00% $7,000,000 40.00% 100% Since there are two possible values for the tax rate, and two possible values for the salvage value, there are four total scenarios as outlined in the following table. Scenario Withholding Tax Salvage Value 1 10.00% S$12,000,000 2 20.00% S$12,000,000 S$7,000,000 3 10.00% 4 20.00% S$7,000,000 Given these scenarios, Sherman seeks to estimate the expected net present value of the project in the face of this uncertainty. Suppose that the required rate of return is 15.00% for all scenarios. The following table adds the present value of after-tax U.S. dollar cash flows to the parent and the initial investment in rows (20) and (21) (respectively) to the capital budgeting analysis. the cumulative net present value of the project in each year. ed to the nearest dollar. Use these rounded values when calculating the cumulative net present value. gative number. Year 0 Year 1 Year 2 Year 3 Year 4 $7,000,000 S$1,400,000 $7,000,000 S$1,400,000 $8,000,000 S$1,600,000 $9,000,000 S$1,800,000 S$5,600,000 S$5,600,000 S$6,400,000 S$7,200,000 $12,000,000 $0.50 $0.50 $0.50 $0.50 2,800,000 2,800,000 3,200,000 9,600,000 s at 15.00% $2,434,783 $2,117,202 $2,104,052 $5,488,831 $10,000,000 $ $ $ $ Year 0 Year 1 Year 2 Year: 14. S$ Remitted before Taxes $7,000,000 $7,000,000 $8,000, 15. Taxes Withheld on $ Remitted S$1,400,000 S$1,400,000 S$1,600, 16. After-Tax S$ Remit S$5,600,000 S$5,600,000 S$6,400, 17. Salvage Value 18. Exchange Rate of S$ $0.50 $0.50 $0.50 19. After-Tax Cash Flows to Parent 2,800,000 $2,434,783 2,800,000 $2,117,202 3,200,0 $2,104,1 20. Present Value of Parent Cash Flows at 15.00% 21 Initial Investment $10,000,000 22. Cumulative NPV $ $
