Question

Calculate the NPV and IRR for this project and decide if it should be undertaken.

A U.S. based company wants to establish a subsidiary in Japan, use the following information.

-The initial investment is 100 million YEN
-The project is expected to last 5 years with a salvage value of 30 million YEN

-The prices, demand, and variable costs are as follows:
Year Price in YEN Demand (units) VC/unit in YEN
1 200 600,000 180
2 210 700,000 190
3 220 800,000 200
4 220 800,000 210
5 200 500,000 210

-Fixed costs in YEN are expected to be 10 million / year
-The Spot exchange rate for Yen is (direct quote = 1 USD = 136.33 JYP and indirect quote = 1 JPY = 0.0073 USD

-The YEN is expected to behave as follows:
Year 1: Loss of 3%
Year 2: Additional loss of 3%
Year 3: Same as year 2
Year 4: Gain of 3%
Year 5: Same as year 4

-The company expects the NWC requirements as follows:
Initial NWC Investment of 30 million YEN
Annual NWC Requirements = 0 million YEN
Japan will impose a 25% tax on income and a 10% tax on remitted funds
There are no U.S. taxes
All Cash flows will be sent to the U.SA parent company at the end of the year
Depreciation expense is 10 years using the straight-line method

-The Required Rate of return on the project is 15%

SHOW ALL CALCULATIONS/FORMULAS and using Excel is preferred :)

Answer 1

To calculate the NPV and IRR for this project, we need to first calculate the cash flows for each year using the given information.

Year 1:

Sales revenue = 200 x 600,000 = 120,000,000 YEN

Variable costs = 180 x 600,000 = 108,000,000 YEN

Fixed costs = 10,000,000 YEN

Depreciation = (100,000,000 - 30,000,000) / 10 = 7,000,000 YEN

Taxable income = 120,000,000 - 108,000,000 - 10,000,000 - 7,000,000 = -5,000,000 YEN

Tax expense = 0.25 x (-5,000,000) = -1,250,000 YEN

Net income after tax = -5,000,000 - 1,250,000 = -6,250,000 YEN

Operating cash flow = -6,250,000 + 7,000,000 = 750,000 YEN

Net cash flow = 750,000 / 136.33 = $5,504.26

Year 2:

Sales revenue = 210 x 700,000 = 147,000,000 YEN

Variable costs = 190 x 700,000 = 133,000,000 YEN

Fixed costs = 10,000,000 YEN

Depreciation = 7,000,000 YEN

Taxable income = 147,000,000 - 133,000,000 - 10,000,000 - 7,000,000 = -3,000,000 YEN

Tax expense = 0.25 x (-3,000,000) = -750,000 YEN

Net income after tax = -3,000,000 - 750,000 = -3,750,000 YEN

Operating cash flow = -3,750,000 + 7,000,000 = 3,250,000 YEN

Net cash flow = 3,250,000 / (136.33 x 1.03) = $23,977.35

Year 3:

Sales revenue = 220 x 800,000 = 176,000,000 YEN

Variable costs = 200 x 800,000 = 160,000,000 YEN

Fixed costs = 10,000,000 YEN

Depreciation = 7,000,000 YEN

Taxable income = 176,000,000 - 160,000,000 - 10,000,000 - 7,000,000 = -1,000,000 YEN

Tax expense = 0.25 x (-1,000,000) = -250,000 YEN

Net income after tax = -1,000,000 - 250,000 = -1,250,000 YEN

Operating cash flow = -1,250,000 + 7,000,000 = 5,750,000 YEN

Net cash flow = 5,750,000 / (136.33 x 1.03 x 1.03) = $42,373.99

Year 4:

Sales revenue = 220 x 800,000 = 176,000,000 YEN

Variable costs = 210 x 800,000 = 168,000,000 YEN

Fixed costs = 10,000,000 YEN

Depreciation = 7,000,000 YEN

Taxable income = 176,000

Step-by-step explanation: