Calculate the depreciation of the plant and equipment

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Reference no: EM133560865

Case

An MNC manufactures and sells cosmetic items in different parts of the whole and has established its brand worldwide. The MNC is considering two mutually exclusive projects to set up manufacturing facilities in two Middle Eastern countries: Project A in Qatar and Project B in the United Arab Emirates.

Project A requires an initial investment of $15 million and is expected to generate cash flows of $4 million annually for 8 years. The salvage value of Project A at the end of its life is estimated to be $3 million. Project B requires an initial investment of $18 million and is expected to generate cash flows of $5 million annually for 8 years. The salvage value of Project B at the end of its life is estimated to be $2 million.

The tax rates in Qatar and Abu Dhabi are 34% and 30% respectively. The current inflation rate in Qatar is 7%, and Abu Dhabi is 5.5%. The current interest rate in Qatar is 8%, and the United Arab Emirates is 6.5%.

There's a 30% probability of inflation increasing by 3% in Qatar and a 50% probability of inflation increasing by 5% in the United Arab Emirates.
The annual fixed costs and overhead expenses are expected to be $2.7 million in Qatar and $3.2 million in the United Arab Emirates. The fixed costs and overhead expenses will be expected to remain the same.
The current exchange rate is $1 = 2.33 Qatari Riyal (QAR), and $1 = 2.35 UAE Dirham (AED). The Qatari Riyal and UAE Dirham exchange rates will be as follows over the next few years.
Currency Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8
QAR $2.37 $2.41 $2.45 $2.49 $2.53 $2.58 $2.61 $2.65
AED $2.39 $2.44 $2.49 $2.54 $2.59 $2.64 $2.69 $2.75
The working capital requirement for the project in Qatar is $7 million and $9 million in United Arab Emirates. The subsidiary will borrow the working capital from the local bank.
There is a remittance ban for the first three years in Qatar. Qatar requires all earnings to be invested in the country by the subsidiary.
There's a 20% probability of an increase in interest rates in Qatar annually by 3%. There's a 25% probability of an increase in interest rates in the United Arab Emirates annually by 2.5%.
All earnings will be remitted back to the parent by the subsidiaries. Qatar imposes a 13% tax on all remittances by the MNCs, while the United Arab Emirates imposes a 15% tax. The Australian government imposes a 10% tax on all remittances received from abroad.
The plant and equipment used in the project are depreciated over ten years using the straight-line depreciation method.
The company requires a rate of return of 15%.

Questions:

Calculate the depreciation of the plant and equipment for the project's duration.

Considering the above information, calculate each project's Net Present Value (NPV).

Which project should the MNC select? Provide a comprehensive recommendation based on your calculations and analysis.

From the parent's perspective, would the NPV of the project be more sensitive to the exchange rate movement if the subsidiary uses parent finance instead of local financing? 03 Mar

Reference no: EM133560865

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