Testlo Inc. is a U.S.-based electric car manufacturer. The company will invest 44 million U.S. dollars in setting up a new subsidiary in Malaysia. The company will use electronic components from the U.S. and source other components locally. Testlo will utilise local labour to assemble and sell the finished products locally. The company expects the project to last for ten years. The expected revenues for the first three years are MYR 76 million, MYR 84 million, and MYR 86 million. It will grow 8.73% annually afterwards. The company expects 0.31 ringgit (MYR) of variable cost for every ringgit of revenue. The fixed costs, including wages, leasing and rental charges, insurance, and maintenance fees, are 28 million ringgit annually. The depreciation is 5 million ringgit per year based on the straight-line method. The subsidiary will remit 60% of the net cash flow to the parent company at the end of the year. The corporate tax rate in Malaysia is 29%. However, by adopting green technology, Tetlo Inc. will receive a lower tax rate of 5% for the first five (5) years. Remittances from Malaysia to the United States are tax exempted. Malaysia imposes a 24% withholding tax and a 3% tax rate on the remittance of foreign-sourced income received in Malaysia. The company will assume a fixed exchange rate of USD 0.27 /MYR for the project. The parent company has a cost of capital of 19%. Testlo Inc. estimates the subsidiary will have a 20 million ringgit salvage value at the end of the project. (a) Prepare a capital budgeting analysis for this Malaysian project by completing the spreadsheet below. [2.5 marks] Testlo Inc. is a U.S.-based electric car manufacturer. The company will invest 44 million U.S. dollars in setting up a new subsidiary in Malaysia. The company will use electronic components from the U.S. and source other components locally. Testlo will utilise local labour to assemble and sell the finished products locally. The company expects the project to last for ten years. The expected revenues for the first three years are MYR 76 million, MYR 84 million, and MYR 86 million. It will grow 8.73% annually afterwards. The company expects 0.31 ringgit (MYR) of variable cost for every ringgit of revenue. The fixed costs, including wages, leasing and rental charges, insurance, and maintenance fees, are 28 million ringgit annually. The depreciation is 5 million ringgit per year based on the straight-line method. The subsidiary will remit 60% of the net cash flow to the parent company at the end of the year. The corporate tax rate in Malaysia is 29%. However, by adopting green technology, Tetlo Inc. will receive a lower tax rate of 5% for the first five (5) years. Remittances from Malaysia to the United States are tax exempted. Malaysia imposes a 24% withholding tax and a 3% tax rate on the remittance of foreign-sourced income received in Malaysia. The company will assume a fixed exchange rate of USD 0.27 /MYR for the project. The parent company has a cost of capital of 19%. Testlo Inc. estimates the subsidiary will have a 20 million ringgit salvage value at the end of the project. (a) Prepare a capital budgeting analysis for this Malaysian project by completing the spreadsheet below. [2.5 marks]
