STION ONE Vision Ltd, a company based in the United States is considering investing in a manufacturing plant in Ghana. The construction cost is estimated at 2 billion Ghanian Cedi. The company estimates the useful life of the project to be 3 years and before tax earnings expected during the first and second year are 3 billion Ghanian Cedi and 2 bilion Ghanian Cedi in the third year. The earnings are to be remitted back to the parent in the United States at the end of each year.. At the end of the third year, Vision Ltd expects to sell the plant for 5 billion Ghanian Cedi to the Ghanian Government. The company has a required rate of return of 17% p.a. The current exchange rate (spot rate) is $ 1/Cedi 8.7 and Cedi is expected to depreciate by 5% per year. The Ghana Government will impose a 20% tax rate on income. In addition, it will impose a 10% withholding tax to any funds remitted by the subsidiary to the parent. The US government will allow a tax credit on taxes paid in Ghana; therefore, earnings remitted to the US parent will not be taxed by the US government. Required: Advise whether the plant should be constructed.
STION ONE Vision Ltd, a company based in the United States is considering investing in a manufacturing plant in Ghana. The construction cost is estimated at 2 billion Ghanian Cedi. The company estimates the useful life of the project to be 3 years and before tax earnings expected during the first and second year are 3 billion Ghanian Cedi and 2 bilion Ghanian Cedi in the third year. The earnings are to be remitted back to the parent in the United States at the end of each year.. At the end of the third year, Vision Ltd expects to sell the plant for 5 billion Ghanian Cedi to the Ghanian Government. The company has a required rate of return of 17% p.a. The current exchange rate (spot rate) is $ 1/Cedi 8.7 and Cedi is expected to depreciate by 5% per year. The Ghana Government will impose a 20% tax rate on income. In addition, it will impose a 10% withholding tax to any funds remitted by the subsidiary to the parent. The US government will allow a tax credit on taxes paid in Ghana; therefore, earnings remitted to the US parent will not be taxed by the US government. Required: Advise whether the plant should be constructed.
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:QUESTION ONE
Vision Ltd, a company based in the United States is considering investing in a
manufacturing plant in Ghana. The construction cost is estimated at 9 billion Ghanian
Cedi. The company estimates the useful life of the project to be 3 years and before tax
earnings expected during the first and second year are 3 billion Ghanian Cedi and 2
bilion Ghanian Cedi in the third year. The earnings are to be remitted back to the
in the United States at the end of each year.. At thé end of the third year, Vision Ltd
expects to sell the plant for 5 billion Ghanian Cedi to the Ghanian Government. The
company has a required rate of return of 17% p.a. The current exchange rate (spot rate)
is $ 1/Cedi 8.7 and Cedi is expected to depreciate by 5% per year.
parent
The Ghana Government will impose a 20% tax rate on income. In addition, it will
impose a 10% withholding tax to any funds remitted by the subsidiary to the parent. The
US government will allow a tax credit on taxes paid in Ghana; therefore, earnings
remitted to the US parent will not be taxed by the US government.
Required:
Advise whether the plant should be constructed.
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