Monk, Inc. is considering a capital budgeting project in Tunisia. The project re

Question

Monk, Inc. is considering a capital budgeting project in Tunisia. The project requires an initial outlay of 1 million Tunisian dinar; the dinar is currently valued at $.70. In the first and second years of operation, the project will generate 700,000 dinar in each year. After two years, Monk will terminate the project, and the expected salvage value is 300,000 dinar. Monk has assigned a discount rate of 12 percent to this project. The following additional information is available:

There is currently no withholding tax on remittances to the U.S., but there is a 20 percent chance that the Tunisian government will impose a withholding tax of 10 percent beginning next year.

There is a 50 percent chance that the Tunisian government will pay Monk 100,000 dinar after two years instead of the 300,000 dinar it expects.

The value of the dinar is expected to remain unchanged over the next two years.

Part A: Determine the net present value (NPV) of the project in each of the four possible scenarios.

Part B:Compute the expected NPV of the project and make a recommendation to Monk regarding its feasibility.

Explanation / Answer

Question A: zero withholding and 300,000 solvage value Cash Solvage Net Pv factor Present Year Flows Value Cashflows at 12% Value 0 -1000000 -1000000 1 -1000000 1 700000 700000 0.892857 625000 2 700000 300000 1000000 0.797194 797193.9 Total 422193.9 Zero withholding with Solvage value of 100,000 Cash Solvage Net Pv factor Present Year Flows Value Cashflows at 12% Value 0 -1000000 -1000000 1 -1000000 1 700000 700000 0.892857 625000 2 700000 100000 800000 0.797194 637755.1 Total 262755.1 10% withholding with Solvage value of 300,000 Cash Solvage Net Pv factor Present Year Flows Value Cashflows at 12% Value 0 -1000000 -1000000 1 -1000000 1 665000 665000 0.892857 593750 2 665000 300000 965000 0.797194 769292.1 Total 363042.1 Annual Income 700000 Less: Depreciation(1000000-300000)/2 350000 Income Before Tax 350000 Withholding tax @10% 35000 Income After Tax 315000 Add: Depreciation 350000 Cashflows from operation 665000 10% withholding with Solvage value of 100,000 Cash Solvage Net Pv factor Present Year Flows Value Cashflows at 12% Value 0 -1000000 -1000000 1 -1000000 1 675000 675000 0.892857 602678.6 2 675000 100000 775000 0.797194 617825.3 Total 220503.8 Annual Income 700000 Less: Depreciation(1000000-100000)/2 450000 Income Before Tax 250000 Withholding tax @10% 25000 Income After Tax 225000 Add: Depreciation 450000 Cashflows from operation 675000 Question B. 10% withholding with Solvage value of 100,000 Cash Solvage Net Pv factor Present Year Flows Value Cashflows at 12% Value 0 -1000000 -1000000 1 -1000000 1 694000 694000 0.892857 619642.9 2 694000 200000 894000 0.797194 712691.3 Total 332334.2 Annual Income 700000 Less: Depreciation(1000000-200000)/2 400000 Income Before Tax 300000 Expected Withholding tax @10% x 0.20 6000 Income After Tax 294000 Add: Depreciation 400000 Cashflows from operation 694000 Expected Value of Solvage = 0.50 x (300,000 + 100000)=200,000 As expected present value of the project is 332,334.20, project is feasible.

Related Questions

Navigate

• Browse (All)
• Browse M
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.