Topic: International investment and financing decisions

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  • 6 Marks

AFM – Nov 2016 – L3 – Q2b – International investment and financing decisions

Compare the advantages and disadvantages of setting up a subsidiary versus licensing for KK Chemicals and suggest ways to mitigate blocked funds risk.

KK Chemicals Ltd, an Accra-based manufacturer of paints, sells its products only in Ghana. Currently, the company wants to expand into other African countries. The directors are considering two options: setting up its own subsidiary company to manufacture and sell the products or licensing a company based in the host country to manufacture and sell the products.

Required:
i) Advise the directors on TWO potential advantages and TWO disadvantages to KK Chemicals of setting up its own subsidiary company to handle production and sale in the host country as against licensing a company in the host country. (4 marks)

ii) Suppose KK Chemicals elects to set up a subsidiary in the host country. Suggest to the directors TWO ways of dealing with the risk of blocked funds. (2 marks)

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  • 10 Marks

AFM – May 2019 – L3 – Q2b – International investment and financing decisions

Calculate the NPV for a multinational company planning to set up a subsidiary in Ghana and provide a recommendation for management.

A Multinational Company (MNC) is planning to set up a subsidiary company in Ghana (where hitherto it was exporting) in view of growing demand for its product and competition from other MNCs. The initial project cost (consisting of Plant and Machinery including installation) is estimated to be GH¢500 million. The net working capital requirements are estimated at GH¢50 million. The company follows the straight-line method of depreciation. Presently, the company is exporting two million units every year at a unit price of GH¢80, with variable costs per unit being GH¢40.

The Chief Finance Officer has estimated the following operating cost and other data in respect of the proposed project:
i) Variable operating cost will be GH¢20 per unit of production.
ii) Additional cash fixed cost will be GH¢30 million p.a. and the project’s share of allocated fixed cost will be GH¢3 million p.a. based on the principle of ability to share.
iii) Production capacity of the proposed project in Ghana will be 5 million units.
iv) Expected useful life of the proposed plant is five years with no salvage value.
v) Existing working capital investment for production & sale of two million units through exports was GH¢15 million.
vi) Exports of the product in the coming year will decrease to 1.5 million units if the company does not open a subsidiary in Ghana, due to competing MNCs setting up subsidiaries in Ghana.
vii) Applicable corporate income tax rate is 35%.
viii) Required rate of return for such a project is 12%.
ix) Assume that there will be no variations in the exchange rate of the two currencies and all profits will be repatriated, as there will be no withholding tax.

Required:
Calculate the Net Present Value (NPV) of the proposed project in Ghana and advise management.
(10 marks)

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  • 8 Marks

AFM – Nov 2018 – L3 – Q2b – International investment and financing decisions

Evaluate the impact of profit repatriation restrictions and provide strategies to deal with blocked funds in international investments.

Suppose the South African government changes its policy on profit repatriation and legislates that profit cannot be repatriated until termination or exit.

i) If Rock can invest blocked funds in South Africa for a 12% annual rate of return, by how much would the project’s NPV differ from your results in sub-question (a) above?
(5 marks)

ii) Suggest THREE (3) ways through which Rock can deal with the risk of blocked funds.
(3 marks)

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  • 12 Marks

AFM – Nov 2018 – L3 – Q2a – International investment and financing decisions

Evaluate an international mining investment opportunity in South Africa using NPV approach for financial feasibility.

Rock Minerals Ltd (Rock) is a minerals mining company based in Ghana. Rock is considering an investment opportunity in South Africa, which involves developing and operating a gold mine and later transferring the mine to the South African government.

Last year, the directors commissioned a special committee to assess investments and regulatory requirements relating to the project. Based on the committee’s report, the directors estimate that it will take two years to develop the mine. Development of the mine entails an immediate outlay of ZAR1.2 million in regulatory requirement expenditures, an investment of ZAR20 million in plants and equipment in the first year, and ZAR15 million for development expenditure in the second year. The directors also estimate that Rock will invest ZAR2 million in net working capital at the beginning of the third year. The investment in net working capital is expected to be increased to ZAR3 million at the beginning of the fifth year.

Commercial production and sales are expected to begin in the third year. Below are estimated operating cash flows before tax in the first three years of commercial production:

Year Revenue collections (ZAR’ millions) Variable operating costs (ZAR’ millions) Fixed operating costs (ZAR’ millions)
3 100 40 20
4 150 50 25
5 210 80 30

At the end of the fifth year, Rock will transfer ownership and control of the mine to the South African government for an after-tax consideration of ZAR100 million. The special committee also reports that the income tax rate for mining operations is 30%, and capital expenditure in relation to acquisition of property, plant, and equipment, and development expenditure qualifies for capital allowance at the rate of 20% per annum on a straight-line basis. Capital allowance is granted at the end of each year of commercial production. On repatriation of profit, the committee reports that the South African government does not restrict the repatriation of profit, and there are no profit repatriation taxes. Rock would repatriate cash returns as they become available.

Rock plans to finance this project using existing capital. Rock’s after-tax cost of capital is 25% in Ghana. The annual rate of inflation is expected to be 11% in Ghana and 5% in South Africa in the coming years. Currently, the rate of exchange between the Ghanaian cedi (GH¢) and the South African rand (ZAR) is GH¢0.3822 = ZAR1.

Required:
Evaluate the project on financial grounds using the net present value (NPV) approach and recommend whether the investment proposal should be accepted for implementation or not.
(12 marks)

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  • 5 Marks

AFM – May 2016 – L3 – Q4b – International investment and financing decisions, Economic environment for multinational organizations

Describe five strategic reasons that might motivate a company to undertake foreign direct investment. —------------------------------------------------------------------ Question: b) At the last meeting of the Board of Directors of Greenwich Ghana Limited, the Board resolved to establish a manufacturing facility in Asia and Europe. Briefly describe FIVE strategic reasons that might have informed management's decision to undertake the Foreign Direct Investment (FDI). (5 marks) Answer: Strategic Reasons for Foreign Direct Investment (FDI) Access to New Markets By establishing a manufacturing facility in foreign countries, the company gains access to new markets, enabling it to expand its customer base and increase market share. This helps diversify the company’s revenue sources and reduces dependency on the domestic market. (1 mark) Cost Reduction Manufacturing in regions with lower production and labor costs can significantly reduce operational expenses. Asia and Europe might offer cost advantages such as cheaper raw materials, lower wages, or favorable tax policies, making FDI a cost-effective decision. (1 mark) Proximity to Resources Setting up operations closer to key resources (such as raw materials or skilled labor) reduces transportation costs and ensures a more efficient supply chain. This proximity can also lead to better quality control and faster production cycles. (1 mark) Government Incentives Many countries offer incentives such as tax holidays, grants, or subsidies to attract foreign investments. These incentives can lower the company’s overall costs and improve profitability, making FDI an attractive option. (1 mark) Strategic Positioning Against Competitors Establishing a presence in key international markets can be a defensive move to counter competitors who are already operating in those regions. By entering these markets, the company can strengthen its competitive position and ensure it does not lose out on potential opportunities. (1 mark) ========== Let me know if you'd like to proceed with the next part or have any further modifications! Describe five strategic reasons that might motivate a company to undertake foreign direct investment. —------------------------------------------------------------------ Question: b) At the last meeting of the Board of Directors of Greenwich Ghana Limited, the Board resolved to establish a manufacturing facility in Asia and Europe. Briefly describe FIVE strategic reasons that might have informed management's decision to undertake the Foreign Direct Investment (FDI). (5 marks) Answer: Strategic Reasons for Foreign Direct Investment (FDI) Access to New Markets By establishing a manufacturing facility in foreign countries, the company gains access to new markets, enabling it to expand its customer base and increase market share. This helps diversify the company’s revenue sources and reduces dependency on the domestic market. (1 mark) Cost Reduction Manufacturing in regions with lower production and labor costs can significantly reduce operational expenses. Asia and Europe might offer cost advantages such as cheaper raw materials, lower wages, or favorable tax policies, making FDI a cost-effective decision. (1 mark) Proximity to Resources Setting up operations closer to key resources (such as raw materials or skilled labor) reduces transportation costs and ensures a more efficient supply chain. This proximity can also lead to better quality control and faster production cycles. (1 mark) Government Incentives Many countries offer incentives such as tax holidays, grants, or subsidies to attract foreign investments. These incentives can lower the company’s overall costs and improve profitability, making FDI an attractive option. (1 mark) Strategic Positioning Against Competitors Establishing a presence in key international markets can be a defensive move to counter competitors who are already operating in those regions. By entering these markets, the company can strengthen its competitive position and ensure it does not lose out on potential opportunities. (1 mark) ========== Let me know if you'd like to proceed with the next part or have any further modifications! Describe five strategic reasons that might motivate a company to undertake foreign direct investment.

b) At the last meeting of the Board of Directors of Greenwich Ghana Limited, the Board resolved to establish a manufacturing facility in Asia and Europe. Briefly describe FIVE strategic reasons that might have informed management’s decision to undertake the Foreign Direct Investment (FDI). (5 marks)

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  • 20 Marks

AFM – Nov 2015 – L3 – Q1 – International investment and financing decisions

Evaluate the financial viability of a Nigerian subsidiary using NPV and MIRR and assess the associated risks and mitigation strategies.

Ahomka Fruity Ltd (Ahomka), a listed company based in Ghana, produces fresh pineapple juice packaged in bottles and cans. The company has been exporting to Nigeria for many years, earning an annual after-tax contribution of NGN5 million. The company wants to establish a wholly-owned subsidiary in Nigeria to produce and sell its pineapple juice products over there. If a subsidiary is established and operated in Nigeria, Ahomka will cease exporting pineapple juice products to Nigeria. However, Ahomka plans to sell some raw materials and services to the subsidiary for cash.

Acquiring a suitable premise, required plant, and equipment, and installing the machinery will take the next two years to complete. Production and sales will commence in the third year and indefinitely.

Capital expenditure is estimated to be NGN10 million at the start of the first year and NGN5 million at the start of the second year. Ahomka will have to make working capital of NGN2 million available at the start of the third year, and this is expected to increase to NGN2.5 million at the start of the fifth year.

The proposed Nigerian subsidiary will produce the following pre-tax operating cash flows at the end of each of the first three years of production and sales:

Production/sales year Pre-tax operating cash flows (NGN ‘000)
1 2,800
2 4,500
3 5,200

The tax rate in Nigeria is 30%, and tax is paid in the same year the profit is earned. Capital allowance is granted on capital expenditure at the end of each year of production/sale at the rate of 30% on a reducing balance basis.

After the first three years of production and sales, post-tax incremental net operating cash flows will grow at a rate of 4% every year to perpetuity.

Ahomka plans to finance the project entirely with loans raised from Ghana at an after-tax cost of 18%. The maximum post-tax operating cash flows possible will be remitted to the parent company at the end of each year to help pay off the loans. Nigeria does not restrict fund remittance to a parent company outside of Nigeria, and there are no taxes on funds remittance.

The Naira-Ghana Cedi exchange rate is currently NGN55.40/GHS. Annual inflation is expected to be 18% in Ghana and 20% in Nigeria.

Required:
(a) Perform a financial appraisal of the project using the net present value and the modified internal rate of return (MIRR) methods, and recommend whether Ahomka should proceed with the project. (10 marks)

(b) Present a paper to the Board of Directors of Ahomka, which advises on potential risks the company might be exposed to if it proceeds with the Nigerian subsidiary project, and strategies the company could employ to avoid or manage the risks.
(Note: Professional marks will be awarded for presentation) (10 marks)

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  • 6 Marks

AFM – Nov 2016 – L3 – Q2b – International investment and financing decisions

Compare the advantages and disadvantages of setting up a subsidiary versus licensing for KK Chemicals and suggest ways to mitigate blocked funds risk.

KK Chemicals Ltd, an Accra-based manufacturer of paints, sells its products only in Ghana. Currently, the company wants to expand into other African countries. The directors are considering two options: setting up its own subsidiary company to manufacture and sell the products or licensing a company based in the host country to manufacture and sell the products.

Required:
i) Advise the directors on TWO potential advantages and TWO disadvantages to KK Chemicals of setting up its own subsidiary company to handle production and sale in the host country as against licensing a company in the host country. (4 marks)

ii) Suppose KK Chemicals elects to set up a subsidiary in the host country. Suggest to the directors TWO ways of dealing with the risk of blocked funds. (2 marks)

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  • 10 Marks

AFM – May 2019 – L3 – Q2b – International investment and financing decisions

Calculate the NPV for a multinational company planning to set up a subsidiary in Ghana and provide a recommendation for management.

A Multinational Company (MNC) is planning to set up a subsidiary company in Ghana (where hitherto it was exporting) in view of growing demand for its product and competition from other MNCs. The initial project cost (consisting of Plant and Machinery including installation) is estimated to be GH¢500 million. The net working capital requirements are estimated at GH¢50 million. The company follows the straight-line method of depreciation. Presently, the company is exporting two million units every year at a unit price of GH¢80, with variable costs per unit being GH¢40.

The Chief Finance Officer has estimated the following operating cost and other data in respect of the proposed project:
i) Variable operating cost will be GH¢20 per unit of production.
ii) Additional cash fixed cost will be GH¢30 million p.a. and the project’s share of allocated fixed cost will be GH¢3 million p.a. based on the principle of ability to share.
iii) Production capacity of the proposed project in Ghana will be 5 million units.
iv) Expected useful life of the proposed plant is five years with no salvage value.
v) Existing working capital investment for production & sale of two million units through exports was GH¢15 million.
vi) Exports of the product in the coming year will decrease to 1.5 million units if the company does not open a subsidiary in Ghana, due to competing MNCs setting up subsidiaries in Ghana.
vii) Applicable corporate income tax rate is 35%.
viii) Required rate of return for such a project is 12%.
ix) Assume that there will be no variations in the exchange rate of the two currencies and all profits will be repatriated, as there will be no withholding tax.

Required:
Calculate the Net Present Value (NPV) of the proposed project in Ghana and advise management.
(10 marks)

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  • 8 Marks

AFM – Nov 2018 – L3 – Q2b – International investment and financing decisions

Evaluate the impact of profit repatriation restrictions and provide strategies to deal with blocked funds in international investments.

Suppose the South African government changes its policy on profit repatriation and legislates that profit cannot be repatriated until termination or exit.

i) If Rock can invest blocked funds in South Africa for a 12% annual rate of return, by how much would the project’s NPV differ from your results in sub-question (a) above?
(5 marks)

ii) Suggest THREE (3) ways through which Rock can deal with the risk of blocked funds.
(3 marks)

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  • 12 Marks

AFM – Nov 2018 – L3 – Q2a – International investment and financing decisions

Evaluate an international mining investment opportunity in South Africa using NPV approach for financial feasibility.

Rock Minerals Ltd (Rock) is a minerals mining company based in Ghana. Rock is considering an investment opportunity in South Africa, which involves developing and operating a gold mine and later transferring the mine to the South African government.

Last year, the directors commissioned a special committee to assess investments and regulatory requirements relating to the project. Based on the committee’s report, the directors estimate that it will take two years to develop the mine. Development of the mine entails an immediate outlay of ZAR1.2 million in regulatory requirement expenditures, an investment of ZAR20 million in plants and equipment in the first year, and ZAR15 million for development expenditure in the second year. The directors also estimate that Rock will invest ZAR2 million in net working capital at the beginning of the third year. The investment in net working capital is expected to be increased to ZAR3 million at the beginning of the fifth year.

Commercial production and sales are expected to begin in the third year. Below are estimated operating cash flows before tax in the first three years of commercial production:

Year Revenue collections (ZAR’ millions) Variable operating costs (ZAR’ millions) Fixed operating costs (ZAR’ millions)
3 100 40 20
4 150 50 25
5 210 80 30

At the end of the fifth year, Rock will transfer ownership and control of the mine to the South African government for an after-tax consideration of ZAR100 million. The special committee also reports that the income tax rate for mining operations is 30%, and capital expenditure in relation to acquisition of property, plant, and equipment, and development expenditure qualifies for capital allowance at the rate of 20% per annum on a straight-line basis. Capital allowance is granted at the end of each year of commercial production. On repatriation of profit, the committee reports that the South African government does not restrict the repatriation of profit, and there are no profit repatriation taxes. Rock would repatriate cash returns as they become available.

Rock plans to finance this project using existing capital. Rock’s after-tax cost of capital is 25% in Ghana. The annual rate of inflation is expected to be 11% in Ghana and 5% in South Africa in the coming years. Currently, the rate of exchange between the Ghanaian cedi (GH¢) and the South African rand (ZAR) is GH¢0.3822 = ZAR1.

Required:
Evaluate the project on financial grounds using the net present value (NPV) approach and recommend whether the investment proposal should be accepted for implementation or not.
(12 marks)

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  • 5 Marks

AFM – May 2016 – L3 – Q4b – International investment and financing decisions, Economic environment for multinational organizations

Describe five strategic reasons that might motivate a company to undertake foreign direct investment. —------------------------------------------------------------------ Question: b) At the last meeting of the Board of Directors of Greenwich Ghana Limited, the Board resolved to establish a manufacturing facility in Asia and Europe. Briefly describe FIVE strategic reasons that might have informed management's decision to undertake the Foreign Direct Investment (FDI). (5 marks) Answer: Strategic Reasons for Foreign Direct Investment (FDI) Access to New Markets By establishing a manufacturing facility in foreign countries, the company gains access to new markets, enabling it to expand its customer base and increase market share. This helps diversify the company’s revenue sources and reduces dependency on the domestic market. (1 mark) Cost Reduction Manufacturing in regions with lower production and labor costs can significantly reduce operational expenses. Asia and Europe might offer cost advantages such as cheaper raw materials, lower wages, or favorable tax policies, making FDI a cost-effective decision. (1 mark) Proximity to Resources Setting up operations closer to key resources (such as raw materials or skilled labor) reduces transportation costs and ensures a more efficient supply chain. This proximity can also lead to better quality control and faster production cycles. (1 mark) Government Incentives Many countries offer incentives such as tax holidays, grants, or subsidies to attract foreign investments. These incentives can lower the company’s overall costs and improve profitability, making FDI an attractive option. (1 mark) Strategic Positioning Against Competitors Establishing a presence in key international markets can be a defensive move to counter competitors who are already operating in those regions. By entering these markets, the company can strengthen its competitive position and ensure it does not lose out on potential opportunities. (1 mark) ========== Let me know if you'd like to proceed with the next part or have any further modifications! Describe five strategic reasons that might motivate a company to undertake foreign direct investment. —------------------------------------------------------------------ Question: b) At the last meeting of the Board of Directors of Greenwich Ghana Limited, the Board resolved to establish a manufacturing facility in Asia and Europe. Briefly describe FIVE strategic reasons that might have informed management's decision to undertake the Foreign Direct Investment (FDI). (5 marks) Answer: Strategic Reasons for Foreign Direct Investment (FDI) Access to New Markets By establishing a manufacturing facility in foreign countries, the company gains access to new markets, enabling it to expand its customer base and increase market share. This helps diversify the company’s revenue sources and reduces dependency on the domestic market. (1 mark) Cost Reduction Manufacturing in regions with lower production and labor costs can significantly reduce operational expenses. Asia and Europe might offer cost advantages such as cheaper raw materials, lower wages, or favorable tax policies, making FDI a cost-effective decision. (1 mark) Proximity to Resources Setting up operations closer to key resources (such as raw materials or skilled labor) reduces transportation costs and ensures a more efficient supply chain. This proximity can also lead to better quality control and faster production cycles. (1 mark) Government Incentives Many countries offer incentives such as tax holidays, grants, or subsidies to attract foreign investments. These incentives can lower the company’s overall costs and improve profitability, making FDI an attractive option. (1 mark) Strategic Positioning Against Competitors Establishing a presence in key international markets can be a defensive move to counter competitors who are already operating in those regions. By entering these markets, the company can strengthen its competitive position and ensure it does not lose out on potential opportunities. (1 mark) ========== Let me know if you'd like to proceed with the next part or have any further modifications! Describe five strategic reasons that might motivate a company to undertake foreign direct investment.

b) At the last meeting of the Board of Directors of Greenwich Ghana Limited, the Board resolved to establish a manufacturing facility in Asia and Europe. Briefly describe FIVE strategic reasons that might have informed management’s decision to undertake the Foreign Direct Investment (FDI). (5 marks)

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  • 20 Marks

AFM – Nov 2015 – L3 – Q1 – International investment and financing decisions

Evaluate the financial viability of a Nigerian subsidiary using NPV and MIRR and assess the associated risks and mitigation strategies.

Ahomka Fruity Ltd (Ahomka), a listed company based in Ghana, produces fresh pineapple juice packaged in bottles and cans. The company has been exporting to Nigeria for many years, earning an annual after-tax contribution of NGN5 million. The company wants to establish a wholly-owned subsidiary in Nigeria to produce and sell its pineapple juice products over there. If a subsidiary is established and operated in Nigeria, Ahomka will cease exporting pineapple juice products to Nigeria. However, Ahomka plans to sell some raw materials and services to the subsidiary for cash.

Acquiring a suitable premise, required plant, and equipment, and installing the machinery will take the next two years to complete. Production and sales will commence in the third year and indefinitely.

Capital expenditure is estimated to be NGN10 million at the start of the first year and NGN5 million at the start of the second year. Ahomka will have to make working capital of NGN2 million available at the start of the third year, and this is expected to increase to NGN2.5 million at the start of the fifth year.

The proposed Nigerian subsidiary will produce the following pre-tax operating cash flows at the end of each of the first three years of production and sales:

Production/sales year Pre-tax operating cash flows (NGN ‘000)
1 2,800
2 4,500
3 5,200

The tax rate in Nigeria is 30%, and tax is paid in the same year the profit is earned. Capital allowance is granted on capital expenditure at the end of each year of production/sale at the rate of 30% on a reducing balance basis.

After the first three years of production and sales, post-tax incremental net operating cash flows will grow at a rate of 4% every year to perpetuity.

Ahomka plans to finance the project entirely with loans raised from Ghana at an after-tax cost of 18%. The maximum post-tax operating cash flows possible will be remitted to the parent company at the end of each year to help pay off the loans. Nigeria does not restrict fund remittance to a parent company outside of Nigeria, and there are no taxes on funds remittance.

The Naira-Ghana Cedi exchange rate is currently NGN55.40/GHS. Annual inflation is expected to be 18% in Ghana and 20% in Nigeria.

Required:
(a) Perform a financial appraisal of the project using the net present value and the modified internal rate of return (MIRR) methods, and recommend whether Ahomka should proceed with the project. (10 marks)

(b) Present a paper to the Board of Directors of Ahomka, which advises on potential risks the company might be exposed to if it proceeds with the Nigerian subsidiary project, and strategies the company could employ to avoid or manage the risks.
(Note: Professional marks will be awarded for presentation) (10 marks)

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