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Spartan Inc. (a US based MNC) is planning to open a subsidiary in Switzerland to manufacture shoes. The new plant will cost SF 1 billion.
4. Spartan Inc. (a US based MNC) is planning to open a subsidiary in Switzerland to manufactureshoes. The new plant will cost SF 1 billion. The salvage value of the plant at the end of the 4 yreconomic life is estimated to be SF 200 million net of any tax effects. This plant will also call forextra inventory holding of SF 300 million, and extra accounts payables of SF 200 million. Projectedsales from this new plant are SF 800 million per year. The fixed costs are estimated to be SF 300million per year, and the variable costs are estimated to be SF 100 million per year. Depreciationon the new plant after accounting for the salvage value will be SF 200 million per year. The Swissgovernment will impose a 35 % tax on the earnings. US govt. will not impose any taxes. 100 % ofthe cash flows will be remitted to the parent. The exchange rate is expected to be stable at $ 0.80per SF. Spartan requires 15 % return on its capital investments. 7 points Please compute:a) Net Investment Cost of the plant b) Cash flows in years 1 through 4 of the projectc) Net Present Value of the projectd) Internal Rate of Return (IRR) of the project e) Should the project be accepted or rejected? Why or why not?f) If the exchange rate scenario unfolds as follows,t = time 0 1 2 3 4 $0.80/SF $0.75/SF $0.70/SF $0.60/SF $0.550/SFRe‐compute the NP. Is the project still acceptable? Why or why not?g) If the exchange rate scenario were to unfold as follows,t=time 0 1 2 3 4 $0.80/SF $0.85/SF $0.90/SF $0.95/SF $1.00/SFRe‐compute the NP. Is the project still acceptable? Why or why not?
