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 i

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     •  Working  capital  requirements   Euro 900,000 Euro 100,000 Production  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:  Year  3:  Year  4:  TZS 53,000 TZS 56,000 TZS 59,000 The  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% REQUIRED: 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  payable, and  allowances  are  available,  one  year  in  arrears.    The  government  of Tanzania  is  anxious  to  encourage  foreign  investment  and  thus  allows  overseas investors  to  repatriate  an  annual  cash  dividend  equal  to  that  year’s  after  tax accounting  profit.    Cash  remitted  to  Italy  from  the  subsidiary  is  not  taxable  in Italy.    The  after  tax  realizable  value  of  the  investment  in  four  years’  time  is expected  to  be  approximately  TZS  200  million. Evaluate  whether  Gulf  Company  should  establish  the  Tanzanian  Subsidiary.