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Challenge Question
Suppose that you are working for a U.S. company that is considering
investing in a project in Malaysia. The investment would cost US $30 million. The investment involves buying a factory that already exists, and using it to make a product that that would be sold in Malaysia. The product has been a success elsewhere in Asia, and a marketing research study shows that the product will be a success in Malaysia. The investment would be $24 million for the factory and $6 million for working capital. Production would begin immediately after your company buys the factory. Annual sales would be 10 million units the first year and would increase 20% per year. The selling price per unit would be 12 Malaysian ringgit per unit. All production costs would be local and would be equal to 5 Malaysian ringgit per unit. The selling price per unit would rise 6% each year and costs would rise 5% each year. The Malaysian government will allow your company to depreciate the factory over three years, although it will not wear out that fast. The corporate tax rate in Malaysia is 50% and in the U.S. is 30%. The Malaysian government will apply a tax of 15% on all remittances. Your company will remit all the cash flow from the project each year. Assume that there is a local buyer who will pay 60 million Malaysian ringgit for the going concern, including the factory and the working capital, at the end of the third year. The exchange rate of the Malaysian ringgit is I ringgit = US$ 0.28. The Malaysian ringgit is expected to strengthen versus the U.S. dollar, so that after one year it will be worth US$ 0.30. After two years it will be worth US$ 0.32, and after three years it will be worth US$0.34. a. Using traditional cross border capital budgeting, what is the NPV of this project? Assume that your company uses a discount rate of 22% for projects of this risk category. |
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