X is a US based industrial material manufacturer. The company will expand the business to Malaysia by fully acquiring a Malaysian fiberboard manufacturing firm for USD 36 milion. The company expects the project to last for ten years with a salvage value of MYR 4 milion. The expected revenues for the first three years are MYR 79 million, MYR BL million, and MYR 87 million. The revenues are expected to grow 5.17% annually afterward. The expected total variable cost is 35% of the yearly revenue. The company will incur a yearly foxed cost of MYR 15 million. The depreciation is MYR 4 million per annum. The subsidiary will remit 90% of the net cash flow to the parent company at the end of every year. Assume that any inward remittance to the U.S. is free of tax. The Malaysian government imposes a withholding tax of 11% and a corporate tax of 28%. The management assumes a fored exchange rate of USD 0.35/MYR for the entire project duration. The cost of capital of the parent is 12% p.a. whereas the cost of capital of the subsidiary is 18%6 p.a. The management requires at least USD 10 million of NPV for the project to be feasible.

1)Prepare a capital budgeting analysis

2)Based on 1) and assuming U.S. dollar would become stronger in the future .The expected exchange rate in year one is USD 0.26/MYR, and the USD value will decrease by 0.01 per MYR every year. The company will hedge 60% of the cash flows using the forward rate of USD 0.21/ MYR.