Havel Robotics Company (a U.S-based firm) is considering establishing a subsidiary in China to assemble industrial robots. If Havel makes the investment, it will operate the plant for four years and then sell the building and equipment to Chinese investors. Havel will be allowed to repatriate 100% of cash flow from operations as dividend each year and terminal value to the United States. The China withholding tax is 10% on dividend and 0 on terminal value. Neither the dividends nor the terminal value will be subject to U.S. income tax. The initial investment would be $1,500,000 (building and equipment, $800,000, and working capital, $700,000). Building and equipment will be depreciated over four years on a straight-line basis (no salvage value). Havel estimates operating profit for each year as follows: Year 1 RMB 3,600,000 Year 2 RMB 3,800,000 Year 3 Pre-tax operating profit RMB 4,000,000 The terminal value of the investment at the end of four years is estimated to be RMB 7,000,000. The corporate income tax rates in China and the United States are 25% and 21%, respectively. Havel uses a 16% discount rate to evaluate all its investment projects. Present value factors at 16% are as follows: Year 4 RMB 4,200,000
Havel Robotics Company (a U.S-based firm) is considering establishing a subsidiary in China to assemble industrial robots. If Havel makes the investment, it will operate the plant for four years and then sell the building and equipment to Chinese investors. Havel will be allowed to repatriate 100% of cash flow from operations as dividend each year and terminal value to the United States. The China withholding tax is 10% on dividend and 0 on terminal value. Neither the dividends nor the terminal value will be subject to U.S. income tax. The initial investment would be $1,500,000 (building and equipment, $800,000, and working capital, $700,000). Building and equipment will be depreciated over four years on a straight-line basis (no salvage value). Havel estimates operating profit for each year as follows: Year 1 RMB 3,600,000 Year 2 RMB 3,800,000 Year 3 Pre-tax operating profit RMB 4,000,000 The terminal value of the investment at the end of four years is estimated to be RMB 7,000,000. The corporate income tax rates in China and the United States are 25% and 21%, respectively. Havel uses a 16% discount rate to evaluate all its investment projects. Present value factors at 16% are as follows: Year 4 RMB 4,200,000
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Part IV.
Havel Robotics Company (a U.S-based firm) is considering establishing a subsidiary in China to
assemble industrial robots. If Havel makes the investment, it will operate the plant for four years and then
sell the building and equipment to Chinese investors.
Havel will be allowed to repatriate 100% of cash flow from operations as dividend each year and
terminal value to the United States. The China withholding tax is 10% on dividend and 0 on terminal
value. Neither the dividends nor the terminal value will be subject to U.S. income tax.
The initial investment would be $1,500,000 (building and equipment, $800,000, and working capital,
$700,000). Building and equipment will be depreciated over four years on a straight-line basis (no salvage
value).
Havel estimates operating profit for each year as follows:
Year 1
RMB 3,600,000
Year 2
RMB 3,800,000
Year 3
Pre-tax operating profit
RMB 4,000,000
The terminal value of the investment at the end of four years is estimated to be RMB 7,000,000.
The corporate income tax rates in China and the United States are 25% and 21%, respectively.
Havel uses a 16% discount rate to evaluate all its investment projects. Present value factors at 16% are
as follows:
Period
1
2
3
4
PV Factor 0.862 0.743 0.641 0.552
Year 4
RMB 4,200,000
The exchange rate between the RMB and the US$ is expected to vary as follows:
RMB 6.8=$1
Jan. 1, Year 1
Dec. 31, Year 1
Dec. 31, Year 2
RMB 6.8 $1
RMB 6.9 $1
RMB 7.0 = $1
Dec. 31, Year 3
Dec. 31, Year 4
RMB 7.1 =$1
Required:
a. Determine the net present value of the investment from a project perspective.
b. Determine the net present value of the investment from a parent company perspective.
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