) Calculate the net present value of the project and advise whether Troop Inc should build the factory. b) Describe the factors Troop Inc. should consider when estimating the value of the project to build a factory. Explain whether the value of the project should be estimated as a stand-alone project in India, or whether the value should be based on the parent’s perspective. c) Troop Inc (US) has agreed to sell the factory to the Indian government in (a) above. Explain how Troop Inc (US) should evaluate the project if, instead of agreeing to sell the factory at the start of the project, they could decide whether or not to sell at the end of the three years. In addition, explain the potential impact on the value of the project to build the factory. d) Troop Inc (US) is setting up a subsidiary in India and is considering the price to charge for one of the components (a digital device that attaches to the treadmills) that it will produce in India and will ship to the US for further processing. The cost of producing the unit in India is 250 Rupees. Additional costs in the US would be $6 per component. The US tax rate is currently 30%, whereas the Indian tax rate for the subsidiary would be 25%. Using an exchange rate of Rupees76/$ calculate the total tax payable in $’s if the transfer price is (i) $8.00 per unit and (ii) $9.00 per unit. Troop Inc (US) expects to sell the digital device to customers in the US for $32. If Troop Inc (US) wishes to minimise global taxes which transfer price should it use? e) Explain what is meant is meant by the term ‘transfer price’. Explain the arm’s length rule with respect to transfer pricing and why governments may insist that multinational organisations use it as their transfer price. f) Nations typically structure their tax systems along one of two basic approaches: the worldwide approach or the territorial approach. Describe the two approaches and include an explanation of why problems arise due to countries using different systems. G) Describe the tax incentives a government might offer a multinational company and explain their potential advantages and disadvantages. H) Troop Inc. (US) is considering whether to set up a subsidiary in India, to produce digital devices that customers can choose to add to their treadmills. Alternatively, Troop Inc.’s management have identified an existing company which has production facilities which can be adapted to produce the devices. Discuss the factors and risks Troop Inc. should consider when deciding whether to establish a new subsidiary in India or acquire the existing company which is based in India. I) Describe the motives multinational companies may have to engage in Foreign Direct Investment and provide examples for each.
Troop Inc. is considering building a factory in India. The estimated cash flows for the project are given below and management consider that a discount rate of 12% reflects the riskiness of the venture. The Indian government has agreed to purchase the factory at the end of three years operation for Rupees 250 million.
Year 0 Year 1 Year 2 Year 3
Total
Total
Increase in US cash inflows (m) 0 2 2 2
Forecast exchange rate Rupees /$ 78.7 78.9 80 80.5
Required:
a) Calculate the
b) Describe the factors Troop Inc. should consider when estimating the value of the project to build a factory. Explain whether the value of the project should be estimated as a stand-alone project in India, or whether the value should be based on the parent’s perspective.
c) Troop Inc (US) has agreed to sell the factory to the Indian government in (a) above. Explain how Troop Inc (US) should evaluate the project if, instead of agreeing to sell
the factory at the start of the project, they could decide whether or not to sell at the end of the three years. In addition, explain the potential impact on the value of the project to build the factory.
d) Troop Inc (US) is setting up a subsidiary in India and is considering the price to charge for one of the components (a digital device that attaches to the treadmills) that it will produce in India and will ship to the US for further processing. The cost of producing the unit in India is 250 Rupees. Additional costs in the US would be $6 per component. The US tax rate is currently 30%, whereas the Indian tax rate for the subsidiary would be 25%.
Using an exchange rate of Rupees76/$ calculate the total tax payable in $’s if the transfer price is (i) $8.00 per unit and (ii) $9.00 per unit. Troop Inc (US) expects to sell the digital device to customers in the US for $32. If Troop Inc (US) wishes to minimise global taxes which transfer price should it use?
e) Explain what is meant is meant by the term ‘transfer price’. Explain the arm’s length rule with respect to transfer pricing and why governments may insist that multinational organisations use it as their transfer price.
f) Nations typically structure their tax systems along one of two basic approaches: the worldwide approach or the territorial approach. Describe the two approaches and include an explanation of why problems arise due to countries using different systems.
G) Describe the tax incentives a government might offer a multinational company and explain their potential advantages and disadvantages.
H) Troop Inc. (US) is considering whether to set up a subsidiary in India, to produce digital devices that customers can choose to add to their treadmills. Alternatively, Troop Inc.’s management have identified an existing company which has production facilities which can be adapted to produce the devices. Discuss the factors and risks
Troop Inc. should consider when deciding whether to establish a new subsidiary in India or acquire the existing company which is based in India.
I) Describe the motives multinational companies may have to engage in Foreign Direct Investment and provide examples for each.
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