Question

Testlo Inc. is a U.S.-based electric car manufacturer. The company will invest 43 million U.S. dollars in setting up a new subsidiary in Malaysia. The company will use electronic components from the U.S. and source other components locally. Testlo will utilize local labor to assemble and sell the finished products locally. The company expects the project to last for ten years. The expected revenues for the first three years are MYR 74 million, MYR 77 million, and MYR 86 million. It will grow 8.17% annually afterwards. The company expects 0.36 ringgit (MYR) of variable cost for every ringgit of revenue. The fixed costs, including wages, leasing and rental charges, insurance, and maintenance fees, are 15 million ringgit annually. The depreciation is 5 million ringgit per year based on the straight-line method. The subsidiary will remit 60% of the net cash flow to the parent company at the end of the year. The corporate tax rate in Malaysia is 28%. However, by adopting green technology, Testlo Inc. will receive a lower tax rate of 6% for the first five (5) years. Remittances from Malaysia to the United States are tax exempted. Malaysia imposes a 22% withholding tax and a 3% tax rate on the remittance of foreign-sourced income received in Malaysia. The company will assume a fixed exchange rate of USD 0.27/MYR for the project. The parent company has a cost of capital of 9%. Testlo Inc. estimates the subsidiary will have a 21 million ringgit salvage value at the end of the project. (a) Prepare a capital budgeting analysis for this Malaysian project by completing the spreadsheet below. [2.5 marks] 1. Demand 2. Price per unit 3. Total Revenue 4. Variable cost per unit 5. Total Variable Cost 6. Fixed costs 7. Non-cash expense (depreciation) 8. Total expense 9. Before-tax earnings of subsidiary 10. Host government tax 11. After-tax earnings of subsidiary 12. Net cash flow to subsidiary 13. MYR remitted by subsidiary 14. Withholding tax on remitted funds 15. MYR remitted after withholding taxes 16. Salvage value 17. Exchange rate (USD per MYR) 18. Cash flows to parent (USD) 19. PV of parent cash flows 20. Initial investment by parent (USD) 21. Cumulative NPV (USD)

Testlo Inc. is a U.S.-based electric car manufacturer. The company will invest 43 million U.S. dollars in setting up a new subsidiary in Malaysia. The company will use electronic components from the U.S. and source other components locally. Testlo will utilize local labor to assemble and sell the finished products locally. The company expects the project to last for ten years. The expected revenues for the first three years are MYR 74 million, MYR 77 million, and MYR 86 million. It will grow 8.17% annually afterwards. The company expects 0.36 ringgit (MYR) of variable cost for every ringgit of revenue. The fixed costs, including wages, leasing and rental charges, insurance, and maintenance fees, are 15 million ringgit annually. The depreciation is 5 million ringgit per year based on the straight-line method. The subsidiary will remit 60% of the net cash flow to the parent company at the end of the year. The corporate tax rate in Malaysia is 28%. However, by adopting green technology, Testlo Inc. will receive a lower tax rate of 6% for the first five (5) years. Remittances from Malaysia to the United States are tax exempted. Malaysia imposes a 22% withholding tax and a 3% tax rate on the remittance of foreign-sourced income received in Malaysia. The company will assume a fixed exchange rate of USD 0.27/MYR for the project. The parent company has a cost of capital of 9%. Testlo Inc. estimates the subsidiary will have a 21 million ringgit salvage value at the end of the project.

(a) Prepare a capital budgeting analysis for this Malaysian project by completing the spreadsheet below. [2.5 marks]
1. Demand
2. Price per unit
3. Total Revenue
4. Variable cost per unit
5. Total Variable Cost
6. Fixed costs
7. Non-cash expense (depreciation)
8. Total expense
9. Before-tax earnings of subsidiary
10. Host government tax
11. After-tax earnings of subsidiary
12. Net cash flow to subsidiary
13. MYR remitted by subsidiary
14. Withholding tax on remitted funds
15. MYR remitted after withholding taxes
16. Salvage value
17. Exchange rate (USD per MYR)
18. Cash flows to parent (USD)
19. PV of parent cash flows
20. Initial investment by parent (USD)
21. Cumulative NPV (USD)

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