Question

Question 3

Financing Subsidy. Needles Corporation, a Dutch MNC, is considering a project in the United States. The initial investment is EUR 25,000. The firm raises 75 percent of this funding in the United States through its subsidiary. This funding is through a term loan at a cost of 6 percent. Needles uses a cost of capital of 12 percent to discount the cash flows of its projects in the United States. This is a four- year project with annual revenues of USD 24,000. Direct expenses are 25 percent, and fixed expenses excluding depreciation are USD 3,000 annually. The spot rate EURUSD equals 1.10. U. S. taxes are 32 percent.
You have additional information that the local financing was obtained at a cost of 6 percent because of certain governmental guarantee programs; otherwise, the interest cost would have been 8.5 percent. What is the NPV of local financing?

Answer 1

Juitial Snuectment EUR 25, DOD An terms ol USD $37,560 Cal culation NPV Year 2 3 JuitHal Snueet neut 27So0 Annual Reuenue 24000 24000 2니000 24000 DArect empenees (s% Annual Reuonue) 60D0) (6ovo) 6000) oud pensle C6000) (Bo0D)0D) 16 S0) (16 s0) 1650) (1650) (3000) C3ovy inance Cost 27,5TD Net Jntome 27 S00) 1335o 13350 133S0 13350 since mettod No le $ele paeciaton io uet proufdad tsoiput ine methad be actep asunud Net ducoue befere dapreciation Doprcaialion 27 133S0 C6875) Net Jucene betorc Tanes Tares at 32 periont Net Juconce after tanes +Depredation adoled back Net caoh 6475 (2D7) 687 louo annualy 11, 278 Net present value Paresent walue Dutflouo Preseut nalue caoh suflous casu 11, 278 X PVAP 1, 4yeau) 278 X 3. D373 -97, SOD 675.23 US D

Note

1. Depreciation has been assumed to be on straight line basis.

2. Present Value Annuity Factor (PVAF) = PVAF (%r, n years)

where, r = discount rate = 12%

n = no of years = 4

PVAF (12%, 4 years) = Sum of 1/(1+r)^n

= Sum of 1/(1+0.12)^1 + ......... + 1/(1 +0.12)^4

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