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Spartan, Inc., is considering the development of a subsidiary in Singapore that would manufacture and sell tennis rackets locally. Spartans financial managers have asked the manufacturing, marketing, and financial departments to provide them with relevant input so they can apply a capital budgeting analysis to this project. In addition, some Spartan executives have met with government officials in Singapore to discuss the proposed subsidiary. The project would end in four years. All relevant information follows.

1. Initial investment. The project would require an initial investment of 20 million Singapore dollars (S$), which includes funds to support working capital. Given the existing spot rate of $.50 per Singapore dollar, the U.S. dollar amount of the parents initial investment is S$20 million $.50 $10 million. The following table shows the cash inflows from this project after taxes

1year

2 year

3 year

4 year

S$ remitted by subsidiary (100% of net cash flow)

S$6,000,000

S$6,000,000

S$7,600,000

S$8,400,000

2. Remitted funds. The Spartan subsidiary plans to send all net cash flows received back to the parent firm at the end of each year. The Singapore government promises no restrictions on the cash flows to be sent back to the parent firm but does impose a 10 percent withholding tax on any funds sent to the parent, as mentioned previously

3. Exchange rates. The spot exchange rate of the Singapore dollar is $.50. Spartan uses the spot rate as its forecast for all future periods.

4. Salvage value. The Singapore government will pay the parent S$12 million to assume ownership of the subsidiary at the end of four years. Assume that there is no capital gains tax on the sale of the subsidiary.

5. Required rate of return. Spartan, Inc., requires a 15 percent return on this project.

Identify relevant solution to address the issue highlighted in the case to judge the feasibility of this proposed project only if the present value of estimated future cash flows (including the salvage value) to be received by the parent exceeds the initial outlay.

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