Zylon Co. is a U.S. firm that provides technology software for the government of Singapore. It will be paid S$12,000,000 at the end of each of the next three years, after which the intellectual property protections for the software will expire and the Singapore project will have zero salvage value. Zylon is subject to a 30 percent corporate income tax rate (federal and state combined) in the United States. Its other cash inflows (such as revenue) are expected to be offset by its other cash outflows (due to operating expenses) each year, so its profits on the Singapore contract represent its expected annual net cash flows. Its financing costs are not considered within its estimate of cash flows. The Singapore dollar (S$) is presently worth $.60, and Zylon expects the spot exchange rate to remain stable at $.60 for at least three years.

The risk-free interest rate in the United States is 6 percent, whereas the risk-free interest rate in Singapore is 14 percent. Zylons capital structure is 60 percent debt and 40 percent equity. The company is charged an interest rate of 12 percent on its debt. Zylons cost of equity is based on the CAPM. It expects that the U.S. annual market return will be 12 percent per year. Its beta is 1.5.

Quiso Co., another U.S. firm, wants to acquire Zylon and offers Zylon a price of $14,000,000. Zylons owner must decide whether to sell the business at this price and hires you to make a recommendation. Estimate the NPV to Zylon as a result of selling the business and use that NPV to make a recommendation about whether Zylons owner should sell the business at the price offered.

-What is Zylons weighted average cost of capital?

-What are Zlyons expected cash flows from keeping the business? (Hint: Dont forget about the taxes.)