Question

• Martin, Inc., is considering the development of a subsidiary in Sydney, Australia that would manufacture and sell high quality guitars on the local Australian Market.
• As one of Martin’s financial managers, you have asked the finance, marketing and manufacturing departments to provide you with all of the relevant input so you can perform a capital budgeting analysis to determine whether to undertake this project or not.
• In addition, a contingent of Martin executives have met with Australian government officials in Sydney to discuss the proposed subsidiary.
• The project would end in 5 years. All of the relevant information that you need to perform this capital budgeting analysis follows here.

• Initial investment: A$12,500,000 million (A$ = Australian dollars)
• Price and consumer demand:

Year 1 and 2: 20,000 units @ A$650/unit

Year 3: 30,000 units @ A$760/unit

Year 4: 40,000 units @ A$850/unit

Year 5: 40,000 units @ A$880/unit

• Costs

Variable costs: Years 1 & 2 A$370/unit, Year 3 A$445/unit, Years 4 and 5 A$600/unit

Fixed costs: A$2,000,000 per year ( A$1,000,000 lease and A$1,000,000 other fixed expense)

• Depreciation A$1,000,000 per year
• Tax laws: 30% income tax
• Remitted funds: 15% withholding tax on remitted funds
• Exchange rates: Spot exchange rate of $US 0.65 for Australian dollar
• Salvage values: A$6 million
• Required rate of return: 18%

Given all of the preceding information, please create an Excel spread sheet that shows the year by year amounts that you have taken into consideration in your capital budget analysis and decide whether or not you will undertake this project.

Answer 1

Year	0	1	2	3	4	5
1.Initial Investment	-12500000
1.a.After-tax salvage(6000000*(1-30%))						4200000
2.Sales units		20000	20000	30000	40000	40000
3.Price/unit		650	650	760	850	880
4.Sales $ (2*3)		13000000	13000000	22800000	34000000	35200000
5.Variable cost/unit		370	370	445	600	600
6.Total variable costs(2*5)		7400000	7400000	13350000	24000000	24000000
7.Fixed costs(given)		2000000	2000000	2000000	2000000	2000000
8.Depn.(given)		1000000	1000000	1000000	1000000	1000000
9.EBT(4-6-7-8)		2600000	2600000	6450000	7000000	8200000
10.Tax at 30%(9*30%)		780000	780000	1935000	2100000	2460000
11.EAT(9-10)		1820000	1820000	4515000	4900000	5740000
12.Add back:Depn.(Row 8)		1000000	1000000	1000000	1000000	1000000
13.Opg. cash flow(11+12)		2820000	2820000	5515000	5900000	6740000
14.Total annual cash flows(1+1a+13)	-12500000	2820000	2820000	5515000	5900000	10940000
15.PV F at 18%(1/1.18^Yr.n)	1	0.84746	0.71818	0.60863	0.51579	0.43711
16.PV at 18%(14*15)	-12500000	2389831	2025280	3356599	3043154	4781975
17.NPV of Cash flows at 18%(Sum of Row 16)	3096839	(A$)
Spot Exchange rate:
1 A $=0.65 US $
So,
NPV in US $
3096839*0.65=	2012945
The project can be undetaken as it generates POSITIVE NPV.