CHAPTER 14 NORTH STAR COMPANY Capital Budgeting This case is intended to illustrate that the value of an international project insensitive to various types of input. It also is intended to show how a computer spreadsheet format can facilitate capital budgeting decisions that involve uncertainty. This case can be performed using an electronic spreadsheet such as Excel. The follow ing present value factors may be helpful input for discounting cash fo PRESENT VALUE INTEREST YEARS FROM NOW FACTOR AT 18% 7100 5758 For consistency in discussion of this case, you should develop your computer spread short in a format that resembles the one used in Chapter 14, with each year representing Copyright 2003 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part Appendix B: Supplemental Cases 475 a column across the top. The use of a computer spreadsheet will significantly reduce the time needed to complete this case North Star Company is considering establishing a subsidiary to manufacture clothing in Singapore. Its sales would be invoiced in Singapore dollars (55). It has forecast net cash flows to the subsidiary as foll YEAR 1 2 3 NET CASH FLOWS TO SUBSIDIARY These cash flows do not include financing costs (interest expenses) on any funds bee- rowed in Singapore. North Star Company also expects to receive 5530 million after taxes as a result of selling the subsidiary at the end of year 6. Assume that there will not be any withholding taxes imposed on this amount The exchange rate of the Singapore dollar is forecasted in Exhibit 8.3 based on three possible scenarios of economic conditions. The probability of each scenario is show below FAIRLY STABLE SS WEAK SS STRONG S Fifty percent of the net cash flows to the subsidiary would be remitted to the parent while the remaining 50 percent would be reinvested to support ongoing operations at the subsidiary North Star Company anticipates a 10 percent withholding tax on funds remitted to the United States The initial investment (including investment in working capital) by North Star in the subsidiary would be 58-40 million. Any investment in working capital (such as accounts receivable, inventory, etc.) is to be assumed by the buyer in year 6. The expected salvage value has already accounted for this trander of working capital to the buyer in year 6. The initial investment could be financed completely by the parent ($20 million, con- verted at the present exchange rate of 5.50 per Singapore dolle to achieve 5540 million) Exhibit 8.3 Three Scenarios of Economic Conditions SCENARIO END OF YEAR FAIRLY STABLES 2 " . SCENARIO WEAK S SCENARIO: STRONG S 43 M 20