HGK, a Thai firm, is considering starting production of high-def TVs in its U.S subsidiary for sale in the U.S. The project has a 4-year life and requires an initial investment of $6,000,000 in equipment. The equipment is to be depreciated (to zero) on a straight line basis and is expected to be sold for a market value of $500,000 at project’s end. HGK is expected to produce and sell 100,000 units of its product in the U.S in each year. Variable costs are expected to be $75/unit and fixed costs $1,900,000 per year. The project requires additions to net working capital of 4,000,000 (to be recovered at project’s end). HGK assigns a cost of capital of 20% to this project. The corporate tax rate in the U.S. is 39% while in Thailand it is 34%. HGK expects to break even in the US (in US $terms).The United States imposes no restrictions on the repatriation of funds of any sort. Both Thailand and the U.S. allow a tax credit for taxes paid in the other country.
a. What is the price per unit of HGK’s product in the U.S.?
b. Assume that the price of the TVs is $134.59/unit. What is the project’s NPV from the Thai parent’s point of view? Suppose that the current exchange rate is 20bt/$ and that it is expected to remain constant until the last year of the project (year t=4) when it is expected to be 25Bt/$.
The question belongs to Finance and it is about new investment. A company wants to invest in TV manufacture and in order to do this, the company has to buy equipment. The fixed cost and variable cost per unit have been given and you need to find the price of the TV and the NPV for the project.
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