International Accounting
5th Edition
ISBN: 9781259747984
Author: Doupnik, Timothy S., Finn, Mark T., Gotti, Giorgio
Publisher: Mcgraw-hill Education,
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Textbook Question
Chapter 10, Problem 11EP
Duncan Street Company (DSC), a British company, is considering establishing an operation in the United States to assemble and distribute smart speakers. The initial investment is estimated to be 25,000,000 British pounds (GBP), which is equivalent to 30,000,000 U.S. dollars (USD) at the current exchange rate. Given the current corporate income tax rate in the United States, DSC estimates that total after-tax annual cash flow in each of the three years of the investment’s life would be US$10,000,000, US$12,000,000, and US$15,000,000, respectively. However, the U.S. national legislature is considering a reduction in the corporate income tax rate that would go into effect in the second year of the investment’s life and would result in the following total annual
The U.S. operation will distribute 100 percent of its after-tax annual cash flow to DSC as a dividend at the end of each year. The terminal value of the investment at the end of three years is estimated to be US$25,000,000. The U.S. withholding tax on dividends is 5 percent; repatriation of the investment’s terminal value will not be subject to U.S. withholding tax. Neither the dividends nor the terminal value received from the U.S. investment will be subject to British income tax.
Exchange rates between the GBP and USD are
Required:
- a. Determine the expected
net present value of the potential U.S. investment from a project perspective. - b. Determine the expected net present value of the potential U.S. investment from a parent company perspective.
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Ipanema Beach, a Brazilian Company, is considering establishing an operation in the United States to assemble and distributes Ipanema hats. The initial investment is estimated to be R$100,000,000 (Brazilian Reals) which is equivalent to US$23,000,000 at the current exchange rate.
Given the current corporate income tax rate in the United States, Ipanema Beach created an estimate of the total after-tax annual cash flow in each of the three years of the investments life (see table below).
However, the U.S. national legislature is considering a reduction in the corporate income tax rate that would go into effect in the second year of the investment’s life, and would result in the following total annual cash flows presented below.
Year
Estimated CF without tax reduction
Estimated CF with tax reduction
1
10500000
10500000
2
1.25E7
1.45E7
3
1.55E7
1.85E7
* If you are not familiar with the notation, 1E6 is 1 time 10 to the power of 6. Essentially how many zeros need to be…
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…
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…
Chapter 10 Solutions
International Accounting
Ch. 10 - Prob. 1QCh. 10 - What makes calculation of NPV for a foreign...Ch. 10 - How does the evaluation of a potential foreign...Ch. 10 - Prob. 4QCh. 10 - How does an ethnocentric organizational structure...Ch. 10 - Prob. 6QCh. 10 - When might it be appropriate to evaluate the...Ch. 10 - Prob. 8QCh. 10 - Prob. 9QCh. 10 - How can a local currency operating budget and...
Ch. 10 - Prob. 11QCh. 10 - What is the advantage of using a projected future...Ch. 10 - Prob. 3EPCh. 10 - Prob. 4EPCh. 10 - Imogdi Corporation (a U.S-based company) has a...Ch. 10 - Philadelphia, Inc. (a Greek company) has a foreign...Ch. 10 - Fitzwater Limited (an Irish company) has a foreign...Ch. 10 - Prob. 9EPCh. 10 - Viking Corporation (a U.S.-based company) has a...Ch. 10 - Duncan Street Company (DSC), a British company, is...
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