Besides quantifiable benefit” intangible benefits such as better quality, faster time to market, prompt and less error-prone order processing and higher ‘:’Customer Satisfaction, and so on as these benefits hold the potential of having a favorable on conductor cash flows, even if they cannot be measured precisely should also he accounted r Be Sides, many foreign projects can provide valuable learning experiences and sharpen skills as they expose companies to tough foreign competition.” This, in turn, helps corporales to adapt their (existing products) as well as develop new produces this is likely to ave a [favorable impart In terms of increased demand for its products in its own home country market. In brief,
only incremental cash inflows after taxes accruing from investment abroad (by either .setting up a new foreign subsidiary or expansion/diversification of existing subsidiary) should form a part of the capital budgeting exercise. The capital budgeting analysis based on total Cf’AT would ‘overstate the profitability of the foreign project and run the risk of resulting in wrong decisions. A US multinational is planning to set up a subsidiary In India I where hitherto it was exporting) in view of the r-;~ growing amend for its product and the competition from other M NC The initial project cost (consisting of plant and machinery including installation) is estimated to he US dollar 400 million; working capital requirements are estimated at R 50 million. 11,e S multinational follows the straight-line method of depreciation nation.
At present, it is exporting 2 million units every yea;.t a uni rice f LEES dollar 80, its variable cost per unit being US dollar 40. The finance manager of the firm has estimated, with respect to the project cost (measured in US dollars) as follows: (j) variable cost of production and sales. $20 per unit, (II) additional fixed costs er annul at $30 million and the share of allocated fixed costs, $3 million, (iii) capacity of the plant set up in India is, to produce
ND sell 4 million units, (iv) the expected economic useful life of the plant is ‘) years, with no salvage value, and (v) the firm’s existing working capital investment in production and sales of 2 million units was $10 million. . n his re port the finance manager ls mentions that export’ will decrease to I.S million units in case the fum does not open, the subsidiary in view of the presence of competing Mn Cs that are in the process of selling up their subsidiaries in India. The firm is subject to 3S per cent corporate tax ate and Its required rate of return for such projects is 12 per cent. Assuming that there will be no variation in the exchange rate between the two countries and that all profits can be repatriated without withholding taxes, advise the LEES multinational regarding he financial viability of having a subsidiary in India