Question

Ten Sports Inc., a Canadian Company, is considering the development of a subsidiary in Singapore that would manufacture and sell tennis rackets locally. Ten Sports is doing a capital budgeting analysis to this project. The project would end in four years. All relevant information follows. Calculate NPV and decide whether the Project can be accepted. You can do the calculations elsewhere (say, Excel) and fill only the answers from A to N in the answers section.

A. Initial investment. The project would require an initial investment of 20 million Singapore dollars (S$), which includes funds to support working capital. Given the existing spot rate of $0.50 per Singapore dollar, the Canadian dollar amount of the parent’s initial investment is S$20 million ÷ $0.50 = C$10 million.

B. Price and consumer demand. The estimated price and demand schedules during each of the next four years are shown here:

                                                                Y1                           Y2                           Y3                           Y4

Price per tennis racket                         S$350                   S$350                    S$360                    S$380

Demand in Singapore                             60,000 units       60,000 units       100,000 units     100,000 units

C. Costs. The variable costs (for materials, labor, etc.) per unit have been estimated and consolidated as shown here:

                                                                                Y1                           Y2                           Y3                           Y4

Variable costs per tennis racket                      S$200                   S$200                    S$250                    S$260

The expense of leasing extra office space is S$1 million per year. Other annual overhead expenses are expected to be S$1 million per year.

D. Tax laws. The Singapore government will allow Ten Sports subsidiary to depreciate the cost of the plant and equipment at a maximum rate of S$2 million per year, which is the rate the subsidiary will use.

The Singapore government will impose a 20 percent tax rate on income. In addition, it will impose a 10 percent withholding tax on any funds remitted by the subsidiary to the parent.

The Canadian government will allow a tax credit on taxes paid in Singapore; therefore, earnings remitted to the Canadian parent will not be taxed by the Canada government.

E. Remitted funds. The subsidiary plans to send all net cash flows received back to the parent firm at the end of each year. The Singapore government promises no restrictions on the cash flows to be sent back to the parent firm but does impose a 10 percent withholding tax on any funds sent to the parent, as mentioned previously.

F. Exchange rates. The spot exchange rate of the Singapore dollar is $0.50. Ten Sports uses exchange rates $0.50, $0.51, $0.53 and $0.53 respectively as its forecast for all future periods.

G. Salvage value. The Singapore government will pay the parent S$12 million to assume ownership of the subsidiary at the end of four years. Assume that there is no capital gains tax on the sale of the subsidiary.

H. Required rate of return for Ten Sports, Inc., is 15 percent on this project.

Answers

A. Sales revenue S$

Y1                             Y2                             Y3                             Y4

B. Variable costs

Y1                            Y2                            Y3                            Y4

C. Other Expenses S$

Y1                            Y2                            Y3                            Y4

D. Depreciation S$

Y1                            Y2                            Y3                            Y4

E. EBT S$

Y1                            Y2                            Y3                            Y4

F. Net Income after Tax S$

Y1                            Y2                            Y3                            Y4

G. Operating Cash Flow S$

Y1                            Y2                            Y3                            Y4

H. Cash flow to be remitted to parent after paying withholding Tax - take care to add salvage value in year 4- S$

Y1                            Y2                            Y3                            Y4

I. Exchange Rates

Y1                            Y2                            Y3                            Y4

J. Cash flow received by Canadian parent in C$

Y1                            Y2                            Y3                            Y4

K. PV factor @15%

Y1                            Y2                            Y3                            Y4

L. PV (C$)

Y1                           Y2                           Y3                           Y4

M. NPV = Cumulative PV from Answer L - initial investment in C$

=

N. Decision - Accept/Reject

=

Answer 1