Suppose that Kittle Co. is a U.S. based MNC that is considering setting up a subsidiary in Singapore. Kittle would like this subsidiary to produce and sell guitars locally in Singapore, and needs assistance with capital budgeting. The duration of this project is four years, with an initial investment of S$20,000,000 (Singapore dollars). Kittle managers have conducted a capital budgeting analysis with the assumption that the exchange rate will be $0.50 over the life of the project. However, Kittle management acknowledges the possibility that the value of the Singapore dollar will fluctuate over time. To that end, Kittle is considering two alternative scenarios: one in which the Singapore dollar is strong relative to the U.S. dollar and one in which the Singapore dollar is weak against the U.S. dollar. The following table shows one section of Kittle's capital budgeting analysis, under the scenario where the Singapore dollar is strong relative to the U.S. dollar. Complete row 22 of the table, filling in the cumulative net present value in each of the four years Note: The discounted values cash flows to the parent are rounded to the nearest dollar. Use these rounded values when calculating row (22). 16. After-Tax S$ Remitted 17.Salvage Value 18. Exchange rate of S$ 19. Cash Flows to Parent [(16) +(17)] X(18) 20. PV of Parent Cash Flows @ 15.00% 21. Initial U.S. $ Investment by Parent 22. Cumulative NPV Year 0 Year 1 S$5,400,000 $0.54 $2,916,000 $2,535,652 $10,000,000 $ Year 2 S$5,400,000 Y S$8 $0.57 $3,078,000 S $5, $2,327,410 $3, Suppose that Kittle Co. is a U.S. based MNC that is considering setting up a subsidiary in Singapore. Kittle would like this subsidiary to produce and sell guitars locally in Singapore, and needs assistance with capital budgeting. The duration of this project is four years, with an initial investment of S$20,000,000 (Singapore dollars). Kittle managers have conducted a capital budgeting analysis with the assumption that the exchange rate will be $0.50 over the life of the project. However, Kittle management acknowledges the possibility that the value of the Singapore dollar will fluctuate over time. To that end, Kittle is considering two alternative scenarios: one in which the Singapore dollar is strong relative to the U.S. dollar and one in which the Singapore dollar is weak against the U.S. dollar. The following table shows one section of Kittle's capital budgeting analysis, under the scenario where the Singapore dollar is strong relative to the U.S. dollar. ulative net present value in each of the four years parent are rounded to the nearest dollar. Use these rounded values when calculating row (22). Year 0 Year 1 S$5,400,000 Year 2 S$5,400,000 Year 3 S$8,424,000 Year 4 S$9,288,000 S$12,000,000 $0.54 $2,916,000 $0.57 $3,078,000 $0.61 $5,138,640 $0.65 $13,837,200 $2,535,652 $2,327,410 $3,378,739 $7,911,464 $10,000,000

Suppose that Kittle Co. is a U.S. based MNC that is considering setting up a subsidiary in Singapore. Kittle would like this subsidiary to produce and sell guitars locally in Singapore, and needs assistance with capital budgeting. The duration of this project is four years, with an initial investment of S$20,000,000 (Singapore dollars). Kittle managers have conducted a capital budgeting analysis with the assumption that the exchange rate will be $0.50 over the life of the project. However, Kittle management acknowledges the possibility that the value of the Singapore dollar will fluctuate over time. To that end, Kittle is considering two alternative scenarios: one in which the Singapore dollar is strong relative to the U.S. dollar and one in which the Singapore dollar is weak against the U.S. dollar. The following table shows one section of Kittle's capital budgeting analysis, under the scenario where the Singapore dollar is strong relative to the U.S. dollar. Complete row 22 of the table, filling in the cumulative net present value in each of the four years Note: The discounted values cash flows to the parent are rounded to the nearest dollar. Use these rounded values when calculating row (22). 16. After-Tax S$ Remitted 17.Salvage Value 18. Exchange rate of S$ 19. Cash Flows to Parent [(16) +(17)] X(18) 20. PV of Parent Cash Flows @ 15.00% 21. Initial U.S. $ Investment by Parent 22. Cumulative NPV Year 0 Year 1 S$5,400,000 $0.54 $2,916,000 $2,535,652 $10,000,000 $ Year 2 S$5,400,000 Y S$8 $0.57 $3,078,000 S $5, $2,327,410 $3, Suppose that Kittle Co. is a U.S. based MNC that is considering setting up a subsidiary in Singapore. Kittle would like this subsidiary to produce and sell guitars locally in Singapore, and needs assistance with capital budgeting. The duration of this project is four years, with an initial investment of S$20,000,000 (Singapore dollars). Kittle managers have conducted a capital budgeting analysis with the assumption that the exchange rate will be $0.50 over the life of the project. However, Kittle management acknowledges the possibility that the value of the Singapore dollar will fluctuate over time. To that end, Kittle is considering two alternative scenarios: one in which the Singapore dollar is strong relative to the U.S. dollar and one in which the Singapore dollar is weak against the U.S. dollar. The following table shows one section of Kittle's capital budgeting analysis, under the scenario where the Singapore dollar is strong relative to the U.S. dollar. ulative net present value in each of the four years parent are rounded to the nearest dollar. Use these rounded values when calculating row (22). Year 0 Year 1 S$5,400,000 Year 2 S$5,400,000 Year 3 S$8,424,000 Year 4 S$9,288,000 S$12,000,000 $0.54 $2,916,000 $0.57 $3,078,000 $0.61 $5,138,640 $0.65 $13,837,200 $2,535,652 $2,327,410 $3,378,739 $7,911,464 $10,000,000

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter16: Country Risk Analysis

Section: Chapter Questions

Problem 5ST

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