Reference no: EM132264475
Assignment -
Dominique is a multinational group. The head office and parent entity are based in country "D" which uses currency D$. The group runs a chain of supermarkets both in country D and in neighbouring countries. Dominique sources its supplies from its home country D, neighbouring countries and also from some more distant countries.
Dominique is funded by a mix of equity and long-term borrowings.
Proposed new project -
The proposed new project is to open a number of new supermarkets in country T, a neighbouring country, which uses currency T$. Market research has already been undertaken at a cost of D$ 0.3 million. If the purposed project is approved additional logistics planning will be commissioned at a cost of D$ 0.38 million payable at the start of 20X0.
Other forecast project cash flows:
Initial investment on 1 January 20X0 - T$ million 150
Residual value at the end of 20X4 - T$ million 40
Net operating cash inflows:
20X0 - T$ million 45
20X1 and 20X2 - growing at 20% a year from 20X0 levels
20X3 and 20X4 - growing at 6% a year from 20X2 levels
Additional information:
On 1 January 20X0, the spot rate for converting D$ to T$ is expected to be D$1 = T$ 2.1145.
Dominique has received two conflicting exchange rate forecasts for the D$/T$ during the life of the project as follows:
Forecast A - A stable exchange rate of D$1= T$2.1145.
Forecast B - A devaluation of the T$ against the D$ of 5.4% a year.
Business tax is 20% in Country T, payable in the year in which it is incurred.
Tax depreciation allowances are available in Country T at 20% a year on a reducing balance basis.
All net cash flows in Country T are to be remitted to Country D at the end of each year.
An additional 5% tax is payable in Country D based on remitted net cash flows net of D$ costs but no tax is payable or refundable on the initial investment and residual value capital flows.
The project is to be evaluated, in D$, at a discount rate of 12% over a five year period.
Required -
(a) Calculate the initial investment for the new project.
(b) Calculate the D$ NPV of the project cash flows as at 1 January 20X0 using each of the two different exchange rate scenarios, Forecast A and Forecast B.
(c) Calculate and discuss the MIRR of the project as at 1 January 20X0 using each of the two different exchange rate scenarios, Forecast A and Forecast B.
(d) Calculate the Pay Back Period for the project at 1 January 20X0 using each of the two different exchange rate scenarios, Forecast A and Forecast B.
(e) Discuss the likely impact of changes in exchange rates and tax rates on the performance of the Dominique group as a whole and how this is likely to influence the financial strategy of the group. No further calculations are required.
(f) Briefly advise Dominique whether or not it should proceed with the project (maximum 250 words).
Attachment:- Assignment File.rar