QUESTION 2 MyFood Ltd, located in the state of Selangor, Malaysia, manufactures frozen Malaysian food and plan to distribute its frozen food California, U.S. In order to be closer to its U.S. market, MyFood is considering moving some of its manufacturing operations to southern California. The operations in California will pay 80% of its accounting profit to MyFood as an annual cash dividend. Assumptions Sales price per unit, Year 1 (USS) Sales price increase, per year Initial sales volume, Year 1, units Sales volume increase, per year Production costs per unit, Year 1 General and administrative expenses per year Production cost per unit increase, per year Depreciation expenses per year Terminal value discount rate MyFood WACC (RM) Value $5.00 3.00% 2,000,000 5.00% $4.00 4.00% $100,000 $80,000 16.00% 20.00% Required: а. Prepare the capital budgeting analysis based on the above data. (Hint: Calculate the present value of the investment in US Dollar and Ringgit Malaysia) Capital Budgeting Analysis Year 0 Year 1 Year 2 Year 3 Sales price, USS Sales volume Revenue Costs per package Total costs Gross profit Less general & administration expenses Less depreciation expenses Operating profit before tax Less U.S. corporate income taxes Net income Dividends distributed (S)(?% of net income) Exchange rate (RM/S) Dividends remitted to parent (RM) Dividend received, after-tax (RM) Terminal value, US$ (discounted @?%) (dividend in Year 3/0.20) Terminal value, RM Total cash flows for discounting (RM) Present value factor (PVIF) (@?%) Present value of total cash flows (RM) Cumulative NPV (RM) in US dollars b. + Assume subsidiary in US remitted 100% of net cash flow and US has charged 10% withholding tax on any funds sent to the parent. How much is the NPV? C. Compare your result in (a) and (b). Advise to the management which is the best practice.
QUESTION 2 MyFood Ltd, located in the state of Selangor, Malaysia, manufactures frozen Malaysian food and plan to distribute its frozen food California, U.S. In order to be closer to its U.S. market, MyFood is considering moving some of its manufacturing operations to southern California. The operations in California will pay 80% of its accounting profit to MyFood as an annual cash dividend. Assumptions Sales price per unit, Year 1 (USS) Sales price increase, per year Initial sales volume, Year 1, units Sales volume increase, per year Production costs per unit, Year 1 General and administrative expenses per year Production cost per unit increase, per year Depreciation expenses per year Terminal value discount rate MyFood WACC (RM) Value $5.00 3.00% 2,000,000 5.00% $4.00 4.00% $100,000 $80,000 16.00% 20.00% Required: а. Prepare the capital budgeting analysis based on the above data. (Hint: Calculate the present value of the investment in US Dollar and Ringgit Malaysia) Capital Budgeting Analysis Year 0 Year 1 Year 2 Year 3 Sales price, USS Sales volume Revenue Costs per package Total costs Gross profit Less general & administration expenses Less depreciation expenses Operating profit before tax Less U.S. corporate income taxes Net income Dividends distributed (S)(?% of net income) Exchange rate (RM/S) Dividends remitted to parent (RM) Dividend received, after-tax (RM) Terminal value, US$ (discounted @?%) (dividend in Year 3/0.20) Terminal value, RM Total cash flows for discounting (RM) Present value factor (PVIF) (@?%) Present value of total cash flows (RM) Cumulative NPV (RM) in US dollars b. + Assume subsidiary in US remitted 100% of net cash flow and US has charged 10% withholding tax on any funds sent to the parent. How much is the NPV? C. Compare your result in (a) and (b). Advise to the management which is the best practice.
Chapter11: Managing Transaction Exposure
Section: Chapter Questions
Problem 41QA
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Transcribed Image Text:QUESTION 2
MyFood Ltd, located in the state of Selangor, Malaysia, manufactures frozen Malaysian food
and plan to distribute its frozen food California, U.S. In order to be closer to its U.S. market,
MyFood is considering moving some of its manufacturing operations to southern California.
The operations in California will pay 80% of its accounting profit to MyFood as an annual
cash dividend.
Assumptions
Sales price per unit, Year 1 (USS)
Sales price increase, per year
Initial sales volume, Year 1, units
Sales volume increase, per year
Production costs per unit, Year 1
General and administrative expenses per year
Production cost per unit increase, per year
Depreciation expenses per year
Terminal value discount rate
MyFood WACC (RM)
Value
$5.00
3.00%
2,000,000
5.00%
$4.00
4.00%
$100,000
$80,000
16.00%
20.00%
Required:
а.
Prepare the capital budgeting analysis based on the above data. (Hint: Calculate the
present value of the investment in US Dollar and Ringgit Malaysia)
Capital Budgeting Analysis
Year 0
Year 1
Year 2
Year 3
Sales price, USS
Sales volume
Revenue
Costs per package
Total costs
Gross profit
Less general &
administration expenses
Less depreciation expenses
Operating profit before
tax
Less U.S. corporate income
taxes
Net income
Transcribed Image Text:Dividends distributed
(S)(?% of net income)
Exchange rate (RM/S)
Dividends remitted to parent
(RM)
Dividend received, after-tax
(RM)
Terminal value,
US$ (discounted @?%)
(dividend in Year 3/0.20)
Terminal value, RM
Total cash flows for
discounting (RM)
Present value factor (PVIF)
(@?%)
Present value of total cash
flows (RM)
Cumulative NPV (RM)
in US dollars
b.
+
Assume subsidiary in US remitted 100% of net cash flow and US has charged 10%
withholding tax on any funds sent to the parent. How much is the NPV?
C. Compare your result in (a) and (b). Advise to the management which is the best
practice.
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