The Wayne Company currently exports 500 calculators per month to Jordan at a price of$60 and the variable cost per calculator is $40. In May 1990, the company is approachedby the government of Jordan with a request that it establish a small manufacturing plantin Jordan. After a careful analysis, the company decides to make an equity investment of$1 million, half of which will represent working capital and the other half-fixed assets. Thecompany will sell the plant to a local investor for the sum of $1 at the end of 5 years andthe central bank of Jordan will repay the company for the working capital of $500,000. Inreturn for an increase in tariffs against other companies, the Wayne Company is willing tosell its calculators in Jordan for $50 per unit. In addition, the company will have to buycertain raw materials from local suppliers and will have to use local managers. The totalcosts of the local managers and materials will be $15 per calculator. Other materials willbe purchased from the parent at $10 per unit and the parent will receive a direct contributionto overhead after variable costs of $5 per unit sold. Under this arrangement, thecompany expects that it will sell 1,000 calculators per month. The fixed assets are to bedepreciated on a straight-line basis over a 5-year period. The company will have to payincome taxes at 50 percent on profits earned in Jordan. The USA also has a 50 percent taxrate with direct credit for Jordanian taxes. The current exchange rate is 10 Jordanian dinarsper dollar and it is expected to stay the same for the next 5 years. There is no restrictionon cash flow repatriation.

(a) Determine the net present value of the project at 10 percent.

(b) The Wayne Company has been informed that, if it decides to reject the project, it would lose its entire export sales. How does this affect the decision by the Wayne Company?

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