NPV & IRR from the Perspective of the Subsidiary Assignment | Homework For You

andelay Corporation expanding its business in Singapore but is considering an additional plant there. The following information has been gathered to assess this project:

• The initial investment required is SGD 5.9 million. The current spot rate is .73 USD/SGD. Inflation is US is projected to be 2% and in Singapore it is projected to be 4% for next 5 years.

• The project will be terminated at the end of Year 5, when the subsidiary will be sold.

• Vandelay is planning to finance the project by combination of debt and equity investment from the parent company. The equity financing is 66% entirely coming from the parent company Vandelay USA. The subsidiary is planning to take two loans. The local debt (SGD denominated) is 16.94% and USD debt is 17.06% for the project. The local and USD debt will be paid in 5 years. All the scheduled payments are priced at current spot rate. With the depreciation in SGD, this might raises FX gains and losses on the total loan payment. The interest rate for US-denominated loan is 5% and the interest rate for SGD denominated is 7%.

• Assuming integrated capital market, the risk free rate in the US is 3%, the equity risk premium is 5% and beta of the project is 0.90.
• Project manager expects the price per unit will remain constant for next five years at SGD 25. It is also expected the project will run 40% capacity in year 1, 50% in year 2, 80% in year 3, and 100% for year 4 and 5. The maximum plant capacity is 1,000,000 units per year.
• The variable costs will increase by rate of inflation in Singapore 4% every year. The variable costs for the first year is SGD 10.
• The sales and general expenses are expected to be 6% of the total sales.
• The investment in Plant and equipment is SGD 2 million. It will be fully depreciate in 5 years.

• The Singapore government will impose an income tax of 20% on income. In addition, Singapore also imposes 10% withholding tax on foreign dividend payment, 5% on interest payment and terminal value of the project. The US corporate tax rate is 35%.

• The subsidiary in Singapore keeps 50% of net income and send remaining 50% to the parent company every year.

• The net changes to operating working capital for subsidiary is 4% of sales revenue.

• The project will be terminated in Year 5. The terminal value of the project is the present value of perpetual free cash flow in the 5^th year. The growth rate in cash flow is assumed to be zero. The terminal value is subject to withholding tax.

1. Estimate WACC for the project.
2. Calculate the NPV & IRR from the perspective of the subsidiary.

3. Calculate the NPV & IRR from the perspective of the parent.

Should Vandelay accept this project? If not explain what could the parent company do?Get Finance homework help today