Synergy Airlines, an American airline, is planning to set up a wholly-owned subsidiary in Singapore to expand the market in Southeast Asia. The project will last for 10 years. They expect sales revenues of S$25 million, S$34 million, and S$40 million in the first three years and the revenue would grow at 9.64% for the rest of the project, as suggested by the average GDP growth rate of Singapore. To start its operation, the airline will need a total investment of US$65 million that consists of US$52 million of fixed assets and US$13 million working capital. The fixed assets have a salvage value of S$14 million and the management allows the subsidiary to depreciate the asset at S$3.8 million per year. The airline will incur a total of $S11 million expense for leasing the aeroplanes, maintenance, and wages every year. The variable cost is expected to be 14% of the sales revenue every year. The subsidiary will remit 60% of the net cash flows to its parent company at the end of each year. The cost of capital of the parent is 18% but the Singaporean project is deemed to be riskier and will attract a 10% premium. Synergy Airlines enjoys a lower corporate tax rate of 11% for its Singaporean project. However, the Singaporean government will impose a withholding tax rate of 28%. The U.S. tax policy does not impose taxes on non-US source earnings and any inward remittance to the U.S. are tax-free. The current spot exchange rate for a Singapore dollar (SGD) is 1.4533 US dollars (USD). The management will use the exchange rate of USD 1.6175 / SGD for the entire duration of the capital budgeting.

(a) Prepare a capital budgeting analysis for this Singaporean project by completing the spreadsheet below. [4 marks]

YEAR 0 1 2 3 4 5 6 7 8 9 10 Demand Price per unit Total Revenue Variable cost per unit Total Variable Cost Fixed costs Non-cash expense (depreciation) Total expense Before-tax earnings of subsidiary Host government tax After-tax earnings of subsidiary Net cash flow to subsidiary S$ remitted by subsidiary Withholding tax on remitted funds S$ remitted after withholding taxes Salvage value Exchange rate of S$ Cash flows to parent (US$) PV of parent cash flows Initial investment by parent (US$) Cumulative NPV (US$)