Question

Scot plc is planning to invest in Ghana and because it is risky to invest there the company will require an after-tax return of at least 20 per cent on the project.

Market research suggests that cash flows from the project in the local currency (the Ghana cedi) will be as follows:

Year 1 2 3 4 5

GHS000 250 450 550 650 800

The current exchange rate is GHS6.7.00/£1; in subsequent years it is expected to be:

Year 1 2 3 4 5

GHS/£ 7.00 6.9 7.1 7.3 8.00

The project will cost GHS600,000 to set up, but the Ghanaian government will pay GHS600,000 to Scot plc for the business at the end of the five-year period. It will also lend Scot plc the GHS250,000 required for initial working capital at the advantageous rate of 6 per cent per year, to be repaid at the end of the five-year period.

Scot plc will pay Ghanaian tax on the after-interest profits at the rate of 20 per cent, while UK tax is payable at the rate of 30 per cent per year. All profits are remitted at the end of each year. There is a double taxation treaty between the two countries. Tax in both countries is paid in the year in which profits arise.

(a) Calculate the net present value of the project and advise on its acceptability.

(b) Discuss the possible problems that might confront a company making the type of decision facing Scot plc.

(b)

i. Discuss the various methods governments use to impose exchange controls on multinational companies

ii. Discuss four ways multinational companies can overcome these exchange controls.

please try to complete my question because my question was not complete ..you didnt answer all

Answer 1

A.

Calculation of taxes	Year 1	Year 2	Year 3	Year 4	Year 5
Cashflow	250	450	550	650	800
Interest	15	15	15	15	15
Profit	235	435	535	635	785
Taxes	47	87	107	127	157
Net profit	188	348	428	508	628
Calculation of Cash flows	Year 1	Year 2	Year 3	Year 4	Year 5	Year 5
Cash inflow	250	450	550	650	800	2,50,000
Taxes	50	90	110	130	160
Interest outflow						75000
Net cash inflow	300	540	660	780	960	1,75,000
Excahnge rate	7	6.9	7.1	0.3	8	8
Net cash inflow	2100	3726	4686	234	7680	1400000
Present value factor	0.8333	0.6944	0.5787	0.4823	0.4019	0.0105
Present value of cash flow	2101	3727	4687	234	7680	1400000
	Net present value of project	14,18,429.00

B .problems that might confront a company making the type of decision facing Scot plc.

• Political factors in Ghana cedi and home country may change whch may in future impose restrictions on investment.
• tax rates may fluctuate
• change in eceomic conditions that may cause change in cash inflows from project etc

1.various methods governments use to impose exchange controls on multinational companies

The Government is the major one who controls MNC’s, from maintaining work arrangements, breaks, pay and holiday to preventing global price fixing and implementing transnational tariffs to protect local business and economy, the government to some companies could be seen as enemy number one. It is necessary to control MNC’s to manage their growth and influence in a country. Similarly a multinational may move abroad to save money on things like manufacture, however, this is bad for local jobs, it may increase profitability for an MNC. For this reason, it is sometimes probable that a government may subsidise the company to prevent it moving abroad.

2. ways multinational companies can overcome these exchange controls

companies may overcome these exchange controls by entering into

• forwards cover contracts
• also hedge risk through hedging contracts
• can also reduce risk through varous money market operations