YomYom Inc., a U.S MNC of dairy products, is considering a foreign direct investment in Malaysia. The estimated initial cost of the investment is RM5,000,000. The Malaysian government intends to offer the company a concessionary loan of RM3,000,000 at a rate of 5% per annum. The loan schedule calls for the principal to be repaid in three equal installments. Other information related to the project is as follow:

Before-tax cash flows	Year 1	RM750,000
	Year 2	RM850,000
	Year 3	RM1,000,000
Borrowing rate in the U.S		7%
Borrowing rate in Malaysia		6%
The marginal tax rate in the U.S		35%
The marginal tax rate in Malaysia		30%
Current spot rate		RM4.00/$1.00
Expected inflation in the U.S		4%
Expected inflation in Malaysia		3%
WACC		10%

1. Based on the information given, you are to provide the necessary advice to the company on whether to go ahead with the investment or not.

2. The APV model is a value-additivity technique where the value is determined by the sum of the present values of the individual cash inflows and outflows. What is the rationale for discounting the various cash flows in the APV model?

Total (15 marks)

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