The mango Republic has just liberalized its markets and is now permitting foreign investors. Tesla, manufacturing has analyzed starting a project in the country and has determined that the project has a negative npv. Why might the company go ahead with the project? What top of option is most likely to add value to this project
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Africa Industries is an industrial conglomerate that is currently evaluating a project to produce a new electronic lock mechanism recently developed by the company. The project will require an immediate outlay of NOK 100,000 on production machinery. The machinery would have a zero scrap value at all times and would not be an allowable expense against tax (as working capital but with zero value at project end). The project is expected to have a 3-year life and produce a net annual cash flow of NOK 61,000 in each year. This amount would be subject to corporation tax. Although the project only has a debt capacity of 30% of cost, the company has unused debt capacity elsewhere and so proposes to finance the project with a NOK 40,000 3-year loan, with an annual interest charge of 10%, together with a NOK 30,000 issue of equity and NOK 30,000 of retained earnings. The new equity issue will incur administration costs amounting to 2% of the money raised, and the debt capital will incur a fee of 1%. Both sets of issue costs are allowable against tax. The electronic sector has an equity beta of 1.26 and an average gearing ratio of 1:3 (debt:equity). The industry's debt can be assumed to have a beta of 0.10. The after-tax return on bonds is 7%, and the after-tax return on the Oslo Stock Exchange market index is 15.5%. Corporate tax is charged at a rate of 28% at each year-end. a) Evaluate the project of the management of Africa Industries. b) How would you evaluate change if the manufacturer of the production machinery offered you a 3-year NOK 100,000 interest-free loan (with an issue cost of 1%).
Akash M.
Question:1. Africa Industries is an industrial conglomerate is currently evaluating a project to produce a new electronic lock mechanism recently developed by the company. The project will require an immediate outlay of NOK 100 000 on production machinery. The machinery would have a zero scrap value at all times and would not be allowable expense against tax (as working capital but with zero value at project end). The project is expected to have a 3-year life and produce a net annual cash flow of NOK 61 000 in each year. This amount would be subject to corporation tax. Although the project only has a debt capacity of 30% of cost, the company has unused debt capacity elsewhere and so proposes to finance the project with a NOK 40 000 3-year loan, with an annual interest charge of 10%, together with a NOK 30 000 issue of equity and NOK 30 000 of retained earnings. The new equity issue will incur administration costs amounting to 2% of the money raised and the debt capital will incur a fee of 1%. Both sets of issue costs are allowable against tax.The electronic sector has an equity beta of 1.26 and an average gearing ratio of 1:3 (debt: equity). The industry's debt can be assumed to have a beta of 0.10. the after-tax return on bonds is 7% and the after-tax return on the Oslo Stock Exchange market index is 15.5% . Corporate tax is charged at a rate of 28% at each year-end.a) Evaluate the project of the management of Africa Industries.b) How would you evaluate change if the manufacturer of the production machinery offered you a 3-year NOK 100 000 interest free loan (with an issue cost of 1%).
(5) Currency manipulation, possibility of nationalization, and restrictions on repatriation of profits will discourage wholly owned operations. Briefly explain with specific examples.
James K.
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