QUESTION SEVEN Hollender Company is a South African based manufacturer of kitchen fumiture. The company's senior management has believed for several years that there is little opportunity to increase

QUESTION SEVEN Hollender Company is a South African based manufacturer of kitchen fumiture. The company's senior management has believed for several years that there is little opportunity to increase sales in the domestic market and wish to set up a manufacturing subsidiary in Tanzania. Because of high transportation costs, exporting from South Africa is not financially viable. The Tanzania subsidiary would involve itself in the construction of a new factory in Dar es Salaam. The projected costs are shown below - Land Building Machinery Initial investment in working capital Now Tshs '000' 23,000 16,000 15.000 Year 1Tshs '000' 62,000 64,000 Production and sales in year two are estimated to be 2,000 kitchens furniture at an average price of Tshs. 200,000 (at current prices) Production and sales in each of years 3-5 is forecasted at 2,500 units. Total local variables costs in Tanzania in year two are expected to be Tshs 110,000 per units (at current prices) No tax allowable depreciation exists on fixed assets. All prices and costs in Tanzania are expected to increase annually by the current rate of inflation. The after-tax realizable value of the investment in five years' time is expected to be approximately Tshs 162 million at price levels then ruling くInflation for each of the next years is expected to be: South Africa 3% Tanzania 5% The cost of capital for the company is 10%. The spot exchange rate is Tshs 129/SAR. Corporate tax in Tanzania is 30% in SA 40%. Taxation 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 South Africa from the subsidiary is not taxable in South Africa I Required; Evaluate whether the Tanzanian subsidiary should be established by Hollender Company