Exchange Rate – NBC Institute

FM – Nov 2016 – L3 – Q4 – International Financial Management

Evaluate a foreign investment decision for Gugi Plc, including cash flow, tax, and exchange rate considerations.

Question

Gugi Plc. is a highly successful manufacturing company operating in Nigeria. In addition to sales within Nigeria, the company also exports to a foreign country (with currency F$) along the ECOWAS sub-region. The export sales generate annual net cash inflow of ₦50,000,000.

Gugi Plc. is now considering whether to establish a factory in the foreign country and stop export from Nigeria to the country. The project is expected to cost F$1 billion, including F$200 million for working capital.

A suitable existing factory has been located, and production could commence immediately. A payment of F$950 million would be required immediately, with the remainder payable at the end of year one. The following additional information is available:

Details	Figures
Annual production and sales	110,000 units
Unit selling price	F$5,000
Unit variable cost	F$2,000
Unit royalty payable to Gugi Plc	₦300
Incremental annual cash fixed costs	F$50 million

Assume that the above cash items will remain constant throughout the expected life of the project of 4 years. At the end of year 4, it is estimated that the net realizable value of the non-current assets will be F$1.40 billion.

It is the policy of the company to remit the maximum funds possible to the parent (i.e., Gugi Plc.) at the end of each year. Assume that there are no legal complications to prevent this.

If the new factory is set up and export to the foreign country is stopped, it is expected that new export markets of a similar worth in North Africa could replace the existing exports. Production in Nigeria is at full capacity, and there are no plans for further capacity expansion.

Tax on the company’s profits is at a rate of 40% in both countries, payable one year in arrears. A double taxation agreement exists between Nigeria and the foreign country, and no double taxation is expected to arise. No withholding tax is levied on royalties payable from the foreign country to Nigeria.

Tax-allowable “depreciation” is at a rate of 25% on a straight-line basis on all non-current assets.

The Directors of Gugi Plc. believe that the appropriate risk-adjusted cost of capital of the project is 13%.

Annual inflation rates in Nigeria and the foreign country are currently 5.6% and 10%, respectively. These rates are expected to remain constant in the foreseeable future. The current spot exchange rate is F$1.60 = ₦1. You may assume that the exchange rate reflects the purchasing power parity theorem.

Required:

(a) Evaluate the proposed investment from the viewpoint of Gugi Plc.
Notes:

Show all workings and calculations to the nearest million.
State all reasonable assumptions. (18 Marks)

(b) State two further information and analysis that might be useful in evaluating this project. (2 Marks)

Answer

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Tags: Cost of Capital, Exchange Rate, Foreign Investment, Inflation, Net Present Value
Level: Level 3

Topic: International financial management

AT – Nov 2017 – L3 – Q6 – Tax Administration and Dispute Resolution

Company on the total tax liabilities

Question

Pategi and Abu are brothers based in Hackettstown, New Jersey, USA. In 2009, they, along with ten other African-Americans, incorporated a telecommunications company named Pategi Telecommunications Limited. The company, headquartered in the USA, has a representative office in Share, Kwara State, Nigeria. In the year ended December 31, 2014, the following transactions were extracted from the company’s records:

Number of Minutes of Telecommunication Transactions:
- U.S. to other parts of the World: 1,705,000 minutes
- U.S. to Nigeria: 374,000 minutes
- Nigeria to U.S.: 426,250 minutes
- Nigeria to Canada: 550,000 minutes
- U.S. to Canada through Nigeria: 794,750 minutes
  Total Minutes: 3,850,000 minutes
Worldwide Expenses Incurred (Naira):
- Refurbishment: N7,150,000
- Rent: N1,100,000
- Depreciation: N25,991,563
- Salaries and Wages: N4,065,188
- Other Disallowable Expenses: N9,658,000
- Administrative Expenses: N4,820,750
  Total Expenses: N52,785,501
Telecommunication Charges:
- Average charge rate per minute: $0.50
- Applicable exchange rate: N198 to $1.00

Required:
Advise the company on the total tax liabilities for the relevant year of assessment. (Total 15 Marks)

Answer

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Tags: Cross-Border Transactions, Exchange Rate, International Taxation, Revenue, Tax Assessment, Tax computation, Tax liabilities, Telecommunications
Level: Level 3

Topic: Tax Administration and Dispute Resolution
Series: NOV 2017

AT – May 2016 – L3 – Q5a – International taxation

Calculate tax credit relief available for a resident with income from the UK under a double taxation agreement.

Question

Mrs. Olivia Quartey is a resident in Ghana and works as the Finance Director of Ghana Trustees Limited. She earned a gross salary of GH¢30,000.00 for the 2014 year of assessment. She contributed 5.5% of her salary to the social security fund. In 2014, the gross royalties that accrued to her was £4,000 from the United Kingdom from which tax of £800 had been deducted with the remainder of £3,200 being remitted to her in Ghana.

Granted that Ghana has a double taxation agreement with the United Kingdom, you are required to calculate the tax credit relief (if any) available to Mrs. Olivia Quartey for the year 2014.
[Exchange rate: GH¢4.50 = £1.] (16 marks)

Tax Rate Table

Income (GH¢)	Rate (%)
First 1,584.00	Free
Next 792.00	5
Next 1,104.00	10
Next 28,200.00	17.5
Exceeding 31,680.00	25

Answer

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Tags: Double Taxation, Exchange Rate, Ghana, Tax Credit, UK
Level: Level 3

Topic: International taxation
Series: MAY 2016

FM – MAY 2017 – L2 – Q2 – Foreign exchange risk and currency risk management | Introduction to Investment Appraisal

Discuss the advantages and disadvantages of the payback method, calculate the NPV for DÉCOR Ltd's investment, and analyze currency risk in an international transaction.

Question

a) Payback method refers to the period of time it takes for the cash flows to cover the initial cost of investment or recoup the initial cost of investment. The period is usually calculated in years.

Required:
Identify TWO advantages and TWO disadvantages of using the payback method in investment appraisal.
(4 marks)

b) DÉCOR Ltd is analyzing the purchase of a new machine to produce product Z. The machine is expected to cost GH¢2,000,000. Production and sales of product Z are forecast as follows:

Year	1	2	3	4
Production & Sales (units/year)	70,000	106,000	150,000	72,000

The current selling price is GH¢30 per unit and is expected to increase by 5% a year. The current variable cost is GH¢18 per unit and is expected to increase by 6% per year. Fixed costs will remain the same, but an increase in working capital is required. Analysis of historical data of the levels of working capital of product Z indicates that, at the start of each year, investment in working capital will need to be 10% of sales revenue of that year.

The company pays tax at 25% per year in the year in which taxable profit occurs. The tax liability is reduced by the capital allowance on the machinery, and DÉCOR Ltd can claim on a straight-line basis over the four-year life of the proposed investment (capital allowance rate of 25% per annum). The new machine will have zero scrap value at the end of the four years. The cost of capital is 15% per year.

Required:
Calculate the Net Present Value (NPV) of the proposed investment and advise whether the proposed investment should be undertaken.
(11 marks)

c) An American company sells goods to a Ghanaian buyer for US$280,000 when the exchange rate is $1 = GH¢4.20. The Ghanaian buyer is allowed three months’ credit, and when the American company eventually receives the US dollars three months later and exchanges them for dollars, the exchange rate has moved to $1 = GH¢4.60.

Required:
i) What was the foreign exchange loss to the Ghanaian buyer?
(3 marks)

ii) Explain currency risk in relation to the above.
(2 marks)

iii) Explain transaction risk in relation to the above.
(2 marks)

iv) What will be the effect of the above on the company’s trading profits?
(3 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Currency risk, Exchange Rate, NPV, Payback Period, Transaction Risk
Level: Level 2

Topic: Foreign exchange risk and currency risk management, Introduction to Investment Appraisal
Series: MAY 2017

FM – Nov 2016 – L3 – Q4 – International Financial Management

Evaluate a foreign investment decision for Gugi Plc, including cash flow, tax, and exchange rate considerations.

Question

Details	Figures
Annual production and sales	110,000 units
Unit selling price	F$5,000
Unit variable cost	F$2,000
Unit royalty payable to Gugi Plc	₦300
Incremental annual cash fixed costs	F$50 million

It is the policy of the company to remit the maximum funds possible to the parent (i.e., Gugi Plc.) at the end of each year. Assume that there are no legal complications to prevent this.

Tax-allowable “depreciation” is at a rate of 25% on a straight-line basis on all non-current assets.

The Directors of Gugi Plc. believe that the appropriate risk-adjusted cost of capital of the project is 13%.

Required:

(a) Evaluate the proposed investment from the viewpoint of Gugi Plc.
Notes:

Show all workings and calculations to the nearest million.
State all reasonable assumptions. (18 Marks)

(b) State two further information and analysis that might be useful in evaluating this project. (2 Marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Cost of Capital, Exchange Rate, Foreign Investment, Inflation, Net Present Value
Level: Level 3

Topic: International financial management

AT – Nov 2017 – L3 – Q6 – Tax Administration and Dispute Resolution

Company on the total tax liabilities

Question

Number of Minutes of Telecommunication Transactions:
- U.S. to other parts of the World: 1,705,000 minutes
- U.S. to Nigeria: 374,000 minutes
- Nigeria to U.S.: 426,250 minutes
- Nigeria to Canada: 550,000 minutes
- U.S. to Canada through Nigeria: 794,750 minutes
  Total Minutes: 3,850,000 minutes
Worldwide Expenses Incurred (Naira):
- Refurbishment: N7,150,000
- Rent: N1,100,000
- Depreciation: N25,991,563
- Salaries and Wages: N4,065,188
- Other Disallowable Expenses: N9,658,000
- Administrative Expenses: N4,820,750
  Total Expenses: N52,785,501
Telecommunication Charges:
- Average charge rate per minute: $0.50
- Applicable exchange rate: N198 to $1.00

Required:
Advise the company on the total tax liabilities for the relevant year of assessment. (Total 15 Marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Cross-Border Transactions, Exchange Rate, International Taxation, Revenue, Tax Assessment, Tax computation, Tax liabilities, Telecommunications
Level: Level 3

Topic: Tax Administration and Dispute Resolution
Series: NOV 2017

AT – May 2016 – L3 – Q5a – International taxation

Calculate tax credit relief available for a resident with income from the UK under a double taxation agreement.

Question

Tax Rate Table

Income (GH¢)	Rate (%)
First 1,584.00	Free
Next 792.00	5
Next 1,104.00	10
Next 28,200.00	17.5
Exceeding 31,680.00	25

Answer

Find Related Questions by Tags, levels, etc.

Tags: Double Taxation, Exchange Rate, Ghana, Tax Credit, UK
Level: Level 3

Topic: International taxation
Series: MAY 2016

FM – MAY 2017 – L2 – Q2 – Foreign exchange risk and currency risk management | Introduction to Investment Appraisal

Discuss the advantages and disadvantages of the payback method, calculate the NPV for DÉCOR Ltd's investment, and analyze currency risk in an international transaction.

Question

a) Payback method refers to the period of time it takes for the cash flows to cover the initial cost of investment or recoup the initial cost of investment. The period is usually calculated in years.

Required:
Identify TWO advantages and TWO disadvantages of using the payback method in investment appraisal.
(4 marks)

b) DÉCOR Ltd is analyzing the purchase of a new machine to produce product Z. The machine is expected to cost GH¢2,000,000. Production and sales of product Z are forecast as follows:

Year	1	2	3	4
Production & Sales (units/year)	70,000	106,000	150,000	72,000

Required:
Calculate the Net Present Value (NPV) of the proposed investment and advise whether the proposed investment should be undertaken.
(11 marks)

Required:
i) What was the foreign exchange loss to the Ghanaian buyer?
(3 marks)

ii) Explain currency risk in relation to the above.
(2 marks)

iii) Explain transaction risk in relation to the above.
(2 marks)

iv) What will be the effect of the above on the company’s trading profits?
(3 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Currency risk, Exchange Rate, NPV, Payback Period, Transaction Risk
Level: Level 2

Topic: Foreign exchange risk and currency risk management, Introduction to Investment Appraisal
Series: MAY 2017

Question Tag: Exchange Rate

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FM – Nov 2016 – L3 – Q4 – International Financial Management

Evaluate a foreign investment decision for Gugi Plc, including cash flow, tax, and exchange rate considerations.

AT – Nov 2017 – L3 – Q6 – Tax Administration and Dispute Resolution

Company on the total tax liabilities

AT – May 2016 – L3 – Q5a – International taxation

Calculate tax credit relief available for a resident with income from the UK under a double taxation agreement.

FM – MAY 2017 – L2 – Q2 – Foreign exchange risk and currency risk management | Introduction to Investment Appraisal

Discuss the advantages and disadvantages of the payback method, calculate the NPV for DÉCOR Ltd's investment, and analyze currency risk in an international transaction.

FM – Nov 2016 – L3 – Q4 – International Financial Management

Evaluate a foreign investment decision for Gugi Plc, including cash flow, tax, and exchange rate considerations.

AT – Nov 2017 – L3 – Q6 – Tax Administration and Dispute Resolution

Company on the total tax liabilities

AT – May 2016 – L3 – Q5a – International taxation

Calculate tax credit relief available for a resident with income from the UK under a double taxation agreement.

FM – MAY 2017 – L2 – Q2 – Foreign exchange risk and currency risk management | Introduction to Investment Appraisal

Discuss the advantages and disadvantages of the payback method, calculate the NPV for DÉCOR Ltd's investment, and analyze currency risk in an international transaction.

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FM – Nov 2016 – L3 – Q4 – International Financial Management

Evaluate a foreign investment decision for Gugi Plc, including cash flow, tax, and exchange rate considerations.

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AT – Nov 2017 – L3 – Q6 – Tax Administration and Dispute Resolution

Company on the total tax liabilities

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AT – May 2016 – L3 – Q5a – International taxation

Calculate tax credit relief available for a resident with income from the UK under a double taxation agreement.

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FM – MAY 2017 – L2 – Q2 – Foreign exchange risk and currency risk management | Introduction to Investment Appraisal

Discuss the advantages and disadvantages of the payback method, calculate the NPV for DÉCOR Ltd's investment, and analyze currency risk in an international transaction.

You're reporting an error for "FM – MAY 2017 – L2 – Q2 – Foreign exchange risk and currency risk management | Introduction to Investment Appraisal"

FM – Nov 2016 – L3 – Q4 – International Financial Management

Evaluate a foreign investment decision for Gugi Plc, including cash flow, tax, and exchange rate considerations.

You're reporting an error for "FM – Nov 2016 – L3 – Q4 – International Financial Management"

AT – Nov 2017 – L3 – Q6 – Tax Administration and Dispute Resolution

Company on the total tax liabilities

You're reporting an error for "AT – Nov 2017 – L3 – Q6 – Tax Administration and Dispute Resolution"

AT – May 2016 – L3 – Q5a – International taxation

Calculate tax credit relief available for a resident with income from the UK under a double taxation agreement.

You're reporting an error for "AT – May 2016 – L3 – Q5a – International taxation"

FM – MAY 2017 – L2 – Q2 – Foreign exchange risk and currency risk management | Introduction to Investment Appraisal

Discuss the advantages and disadvantages of the payback method, calculate the NPV for DÉCOR Ltd's investment, and analyze currency risk in an international transaction.

You're reporting an error for "FM – MAY 2017 – L2 – Q2 – Foreign exchange risk and currency risk management | Introduction to Investment Appraisal"

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