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Gulf Company is an Italian based manufacturer of radios. The company’s senior management team has believed for several years that there is an opportunity to increase sales in the domestic market and

Gulf Company is an Italian based manufacturer of radios.  The company’s senior management team has believed for several years that there is an opportunity to increase sales in the domestic market and wish to set up a manufacturing subsidiary in Tanzania.  Setting up the Tanzanian subsidiary would involve construction of a new factory in Dar es Salaam.  The initial project cash investment is estimated at Euro 1,000,000 divided as follows:Fixed assets   Euro 900,000Working capital requirements Euro 100,000Production and sales are expected to be constant at 20,000 units per annum.  The average price per radio is estimated as follows: Year 1:  TZS 55,000 Year 2:  TZS 53,000 Year 3:  TZS 56,000 Year 4:  TZS 59,000The variable cost ratio is forecast at 30% of the selling price and is expected to remain constant.  Annual fixed costs (excluding depreciation), are forecast at TZS 80,000,000.  As per agreement between Gulf Company and the authorities in Tanzania, depreciation expenses are not tax allowable.  Inflation for each economy in the next four years is expected to be: ITALY 4%, TANZANIA 6%. The cost of capital for the company is 10%.  The spot exchange rate is TZS 1400/Euro.  Corporate tax in Tanzania is 30%, in Italy 40%.  Tax is payabl

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