27.a.

Year 0
1. Demand
2. Price
3. Revenue
4. Variable cost per unit
5. Total variable cost
6.Fixed cost
7. Depreciation expense
8. Interest expense
9. Total expenses
10.Before-tax earnings of
subsidiary
11. Host government tax
(30%)
12. After-tax earnings of
subsidiary
13. Net cash flows to
subsidiary
14. NZD remitted by
subsidiary (100% of NZD)
15.Withholding tax on
remitted funds (10%)
16. NZD remitted after
withholding tax

Year 1
40,000
NZD 500
NZD
20,000,000
NZD 30
NZD 1,200,000
NZD 6,000,000
NZD 5,000,000
NZD 2,800,000
NZD
15,000,000

Year 2
50,000
NZD 511

NZD 5,000,000

NZD 10,000,000

NZD 1,500,000

NZD 3,000,000

NZD 3,500,000

NZD 7,000,000

NZD 8,500,000

NZD 12,000,000

NZD 8,500,000

NZD 12,000,000

NZD 850,000

NZD 1,200,000

NZD 7,650,000

NZD 10,800,000

$0.52
$3,978,000

$0.54
$5,832,000

NZD
14,328,000
NZD
52,000,000
$0.56
$37,143,680

$3,315,000

$4,050,000

$21,495,185

-$21,685,000

-$17,635,000

$3,860,185

NZD 25,550,000
NZD
NZD
NZD
NZD
NZD

35
1,750,000
6,000,000
5,000,000
2,800,000

NZD 15,550,000

17. Salvage value

18. Exchange rate of NZD
19. Cash flows to parent
20. PV of parent cash flows
(20% discount rate)
21. Initial investment
22. Cumulative NPV

$25,000,0
00
$25,000,0
00

Year 3
60,000
NZD 530
NZD
31,800,000
NZD 40
NZD 2,400,000
NZD 6,000,000
NZD 5,000,000
NZD 2,800,000
NZD
16,200,000
NZD
15,600,000
NZD 4,680,000
NZD
10,920,000
NZD
15,920,000
NZD
15,920,000
NZD 1,592,000

b.
Year 0

Year 1
40,000
NZD 500
NZD
20,000,000
NZD 30

NZD 25,550,000
NZD 35

5. Total variable cost

NZD 1,200,000

NZD 1,750,000

6.Fixed cost

NZD 6,000,000

NZD 6,000,000

7. Depreciation expense
8. Interest expense

NZD 5,000,000
NZD 0

NZD 5,000,000
NZD 0

1. Demand
2. Price
3. Revenue
4. Variable cost per unit

Year 2
50,000
NZD 511

Year 3
60,000
NZD 530
NZD
31,800,000
NZD 40
NZD
2,400,000
NZD
6,000,000
NZD
5,000,000
NZD 0

9. Total expenses
10.Before-tax earnings of
subsidiary
11. Host government tax
(30%)
12. After-tax earnings of
subsidiary
13. Net cash flows to
subsidiary
14. NZD remitted by
subsidiary (100% of NZD)
15.Withholding tax on
remitted funds (10%)
16. NZD remitted after
withholding tax

NZD
12,200,000

NZD 12,750,000

NZD 7,800,000

NZD 12,800,000

NZD 2,340,000

NZD 3,840,000

NZD 5,460,000
NZD
10,460,000
NZD
10,460,000

NZD 8,960,000
NZD 13,960,000

NZD 1,046,000

NZD 1,396,000

NZD 9,414,000

NZD 12,564,000

$0.52
$4,895,280

$0.54
$6,784,560

NZD
13,400,000
NZD
18,400,000
NZD
5,520,000
NZD
12,880,000
NZD
17,880,000
NZD
17,880,000
NZD
1,788,000
NZD
16,092,000
NZD
70,000,000
$0.56
$48,211,520

$4,079,400

$4,711,500

$27,900,185

-$30,920,600

-$26,209,100

$1,691,085

17. Salvage value after taxes

18. Exchange rate of NZD
19. Cash flows to parent
20. PV of parent cash flows
(20% discount rate)
21. Initial investment
22. Cumulative NPV

$35,000,0
00
$35,000,0
00

NZD 13,960,000

This alternative financing arrangement is not as much feasible as the original one.
d.
Year 0
1. Demand
2. Price
3. Revenue
4. Variable cost per unit
5. Total variable cost
6.Fixed cost
7. Depreciation expense
8. Interest expense
9. Total expenses
10.Before-tax earnings of subsidiary
11. Host government tax (30%)
12. After-tax earnings of subsidiary
13. Net cash flows to subsidiary

Year 1
40,000
NZD 500
NZD
20,000,000
NZD 30
NZD
1,200,000
NZD
6,000,000
NZD
5,000,000
NZD
2,800,000
NZD
15,000,000
NZD
5,000,000
NZD
1,500,000
NZD
3,500,000
NZD
8,500,000

Year 2
50,000
NZD 511
NZD
25,550,000
NZD 35

Year 3
60,000
NZD 530
NZD
31,800,000
NZD 40

NZD 1,750,000

NZD 2,400,000

NZD 6,000,000

NZD 6,000,000

NZD 5,000,000

NZD 5,000,000

NZD 2,800,000

NZD 2,800,000

NZD
15,550,000
NZD
10,000,000

NZD
16,200,000
NZD
15,600,000

NZD 3,000,000

NZD 4,680,000

NZD 7,000,000
NZD
12,000,000

NZD
10,920,000
NZD
15,920,000

14. NZD remitted by subsidiary

(100% of NZD)
15. Interest earned on funds to be
remitted (6%)
16. Cumulative total cash flows

NZD
8,500,000
NZD
8,500,000

17. NZD remitted by subsidiary

18. Withholding tax on remitted
funds(10%)
19. NZD remitted after witholding
taxes

NZD
15,920,000
NZD
1,260,600.00
NZD
38,190,600.00
NZD
38,190,600.00
3,819,060.00
NZD
34,371,540.00
NZD
52,000,000.00
0.56
$48,368,062.4
0
$27,990,776.8
5

17. Salvage value

18. Exchange rate of NZD
19. Cash flows to parent
20. PV of parent cash flows (20%
discount rate)
21. Initial investment
22. Cumulative NPV

NZD
12,000,000
NZD
510,000.00
NZD
21,010,000.00

-25000000
$2,990,776.85

e.

CFt
n
SVn = IO
1+ k )
t (
( 1 + k )

= $25,000,000 - $3,315,000 - $4,050,000 - $4,643,333 = $22,449,601= NZD 40,088,572

f. Present value of selling price = $27,000,000/1.2 = $22,500,000
Total present value of one-year cash flow and selling price = $22,500,000 + $3,315,000 =
$25,815,000
NPV if the firm sells the subsidiary after 1 year = $25,815,000 -$25,000,000 = $815,000