CIC 2006 GLOBAL FINANCE

TABLE OF CONTENTS

NO Content Page

1 Introduction 2-4

2 Purchasing Power Parity(PPP) 4-6

3 Exchange Rates Calculation 6

4 Project’s Viewpoint 7-11

● Calculation

5 Parent’s Viewpoint 12-22

● Calculation with withholding tax and

● Calculation without withholding tax

6 Conclusion 23

7 Appendices 24

8 References 25

INTRODUCTION

Greenfield investment is type of foreign direct investment where company and the

organization operated in foreign country. The company or organization that operated in the
 CIC 2006 GLOBAL FINANCE

foreign country build up new facilities in order to operate in another country. The benefit or

reason of this greenfield investment which is it give a huge level of control over business

operation, brand, image and etc. Next, the greenfield investment also helps to bypass the trade

restriction such as taxes and tariffs by the foreign country. The organization or a company is

also able to achieve economies of scale such as in marketing the business, production and so

on and also it created employment opportunities through this greenfield investment to the

foreign country that our company is taking place. Our company is I.O.I.T company, one of the

foreign subsidiaries of Malaysian MNC that is the new company that operates the business and

located in Canada.

Greenfield Investment in Canada

Canada is the amazing country for investment which is Canada gives an investor

preferential market entry through 14 trade agreements to 51 countries with almost 1.5 billion

users and the combined GDP of this is US$49.3 trillion Next, Canada also has a good

infrastructure in term of transportation which is a good and best placed to be as a central hub

trade for the global. The Canada has a good transportation in the world and one of it, is an air

transportation and the Canada coastal ports give a direct maritime access to the other country

such as in Asia, Europe and South America and also Canada has a Great Lakes which is it also

allow easy access or door to the United stated and it will make the trade or investment business

working smooth, easy and good. Furthermore, the reason greenfield investment in Canada is

because this country has a lot of the educated worker in the world around 58% of Canadians

which is age between 25-year-old until 64-year-old graduated from post-secondary institutions

and Canada also has a list at five places of the most attractive country for skill talent. Besides

that, Canada has lower cost, and lower risk which is Canada have a lower tax rate on the new

business investment among G7 which is United Kingdom, United State, France, Italy, Japan

and Germany, not just lower cost and lower risk Canada also have a good political stability,

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sound banking system and ranked in six places in the world and also the country have least

corruption and be ranked in the 12th place globally. The quality of life in Canada is also good,

which is what Canada offers or gives a perfect place to live, work and play and the best country

for human freedom.

Net Present Value (NPV) and Interest Rate of Return (IRR)

Among the common approaches for estimating capital budgeting, both strategies, NPV and IRR,

are to assess what is feasible for the procurement or renovation of plant and facilities, new

product line or property as a long-term expenditure. In such time frames, NPV investigates the

project's estimated cash balance, while IRR is the discount rate when NPV is negative. The

higher the NPV or IRR, the stronger the project's investment desire.

International Capital Budgeting

A Malaysian MNC is considering a greenfield investment in Canada.

● Cost of the project is expected to be MYR100 million.

● 20% of the project cost as the local currency cash flows in the first year.

● Cash flows are expected to increase 20% annually for the next four years.

● The project could be sold for 20% of initial cost at the end of five years.

● Negative impact occurred on the MNC’s domestic cash flows due to lost exports from a

competing older product line and it is estimated to be MYR2 million per annum until the

project is sold.

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● Any remittances to the outside world, including terminal sale proceeds from the project,

would attract a 20% withholding tax.

● A minimum return of 12% per annum.

PURCHASING POWER PARITY

We would use the formula purchasing power of parity of the Forward Buying Rate of MYR in

American Terms to predict the Forward Buying Rate of MYR,

(1+i d )
F=S
( (1+i f ) )
Where;

F = Forward buying rate

S = Spot exchange rate

i d = Domestic inflation rate

i f = Foreign country inflation rate

Calculation for Forward Buying Rate:

Year Forward Rate

0 Spot Rate , F=MYR3.1494/CAD

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1 F=[3.1494 ×(1+0.0175)]/(1+ 0.0025)

= MYR 3.1965/CAD

2 F=[3.1965 ×(1+ 0.0175)]/(1+0.0025)

= MYR 3.2443/CAD

3 F=[3.2443 ×(1+ 0.0175)]/(1+0.0025)

= MYR 3.2928/CAD

4 F=[3.2928 ×(1+0.0175)]/(1+0.0025)

= MYR 3.3420/CAD

5 F=[3.3420 ×(1+0.0175)]/(1+0.0025)

= MYR 3.3920/CAD

*Spot rate used is RM3.1494/CAD as of 1 December 2020.

*Domestic Interest rate (Malaysia) is 1.75% as of 1 December 2020 obtained from BNM

*Foreign Interest rate (Canada) is 0.25% as of 1 December 2020 obtained from Bank of

Canada

American terms with MYR as home currency

Buying rate (used when converting CAD back to MYR) MYR3.1494 / 1 CAD

Selling rate (used when converting MYR to CAD) MYR3.1511 / 1 CAD

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European terms with MYR as home currency

Buying rate (used when converting MYR to CAD) 0.3173 CAD / MYR1

Selling rate (used when converting back MYR to CAD) 0.3175 CAD / MYR1

Year 0 1 2 3 4 5

Exchange Rate

Buying MYR3.1494 MYR3.1965/ MYR3.2443/ MYR3.2928/ MYR3.3420/ MYR3.3920/

Rate / 1 CAD 1 CAD 1 CAD 1 CAD 1 CAD 1 CAD

Selling MYR3.1511/

Rate 1 CAD

Subsidiary-Project’s Viewpoint

From the project’s viewpoint, we will calculate the NPV and IRR of the project without

considering the effects it might occur when converting the revenue back to parent’s company

in Malaysia.

Step 1: The project is expected to cost MYR100 million.

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First, we will convert MYR 100 million into Canadian dollar in order to start our Greenfield

investment in Canada.

Initial Layout = MYR 100,000,000 ÷ ( MYR 3.1494 / CAD 100 )

= MYR 100,000,000 x ( CAD 31.7521 / MYR 1 )

= CAD 3,175,210,000 @ CAD 31.7521 million

Therefore, the initial layout of our investment would be CAD 3,175,210,000 after the

conversion of MYR into CAD.

Step 2 :Generate local currency cash flows in the country it is operating equivalent to

20% of the project cost in the first year.

The investment would generate a cash inflow of 20% x Initial Layout as the revenue of the

project in the first year.

Cash Inflow 1 = 20% x Initial Layout

= CAD 31.7521 million x 20 %

= CAD 635,042,000 @ CAD 6.3504 million

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Step 3: The cash flows are expected to increase 20% annually for the next four years

In order to calculate the cash inflow of increasing 20% annually, we would apply the

following formula,

Cash Inflow = Year 1 Cash Inflow × 1.20n= Cash Inflow for the year.

Where the n is number of years,

By applying the formula, we will get the following result:

Cash Inflow 2= CAD 6.3504 million × 1.201 = CAD 7.6205 million

Cash Inflow 3= CAD 6.3504 million × 1.202 = CAD 9.1446 million

Cash Inflow 4= CAD 6.3504 million × 1.203 = CAD 10.9735 million

Cash Inflow 5= ( CAD 6.3504 million × 1.204 ) + CAD 6.3504 million

= CAD 19.5186 million

Step 4: At the end of five years, the project could be sold for 20% of initial cost.

As the project could be sold in the end of five years, it will be considered as the salvage value

for the project.

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Salvage Value = Initial cost of project × 20%

Salvage Value = CAD 31.7521 million x 20%

Salvage value = CAD 6.3504 million

Before we proceed to the next step from parent viewpoint, we will now calculate the PV of

each cash flow in order to calculate NPV and also the IRR. The minimum required return per

annum is 12 %

Using the PV formula;

Or NPV and IRR calculations, we use the financial calculator; we will input the figure as follow,

I / YR = 12%

CF0 = - 31.7521

CF 1= 6.3504

CF2 = 7.6205

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CF3 = 9.1446

CF4 = 10.9735

CF5 = 19.5186

NPV = 4.5511

IRR = 16.666

Year 0 1 2 3 4 5

Investment MYR100
million/3.1494=CA
D 31.7521m

Expected Operating CAD31.7521m(0.2) CAD6.3504m(1.2)= CAD7.6205m(1.2) CAD9.1446m(1.2)= CAD10.9735m(1.2)

Cash Flow =CAD6.3504m CAD7.6205m =CAD9.1446m CAD10.9735m =CAD13.1682m

Salvage Value CAD31.7521m(0.2)

=CAD6.3504m

Net Cash Flow -CAD31.7521m CAD6.3504m CAD7.6205m CAD9.1446m CAD10.9735m CAD19.5186

Present Value of -CAD31.7521m CAD6.3504m/1.12 CAD7.6205m/ CAD9.1446m/ CAD10.9735m/ CAD19.5186m/

Expected Cash Flow =CAD5.67m
(12%) 1.122=CAD6.075 1.123=CAD6.508 1.124 =CAD6.973 1.125=CAD11.07
0m 9m 9 54

NPV CAD4.5511m

IRR 16.667%

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In conclusion, this project generates a Net Present Value of CAD 4.5511m and IRR of

16.667% which is higher than the minimum required rate of return of 12%. Thus, this we

will accept the project from the project’s viewpoint.

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Parent’s Viewpoint (With Withholding Tax)

From the parent’s viewpoint, we have to calculate the withholding tax of 20% when we

convert the revenue generated in Canada back to parents’ company, Malaysia and also the

negative impact on the MNC’s domestic cash flows due to lost exports from a competing

older product line.

Step 5: Any remittances to the outside world, including terminal sale proceeds from the

project, would attract a 20% withholding tax.

Formula

Cash flow after withholding tax ( Year n ) = Cash inflow n x (100%-20%)

Where n is number of year,

Net Cash flow after withholding tax ( Year 0) = -CAD31.7521 million

Net Cash flow after withholding tax ( Year 1) = Cash inflow 1 x 80%

= CAD 6.3504 million x 80%

= CAD 5.0803 million

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Net Cash flow after withholding tax (Year 2 ) = CAD 7.6205 million x 80%

= CAD 6.0964 million

Net Cash flow after withholding tax (Year 3 ) = CAD 9.1446 million x 80%

= CAD 7.3157 million

Net Cash flow after withholding tax (Year 4 ) = CAD 10.9735 million x 80%

= CAD 8.7788 million

Net Cash flow after withholding tax (Year 5 ) = ( CAD 13.1682 million + CAD 6.3504) x 80%

= CAD 15.6149 million

Now, we will calculate the amount of revenue that will be transferred back to parents’

company by multiplying the Net Cash flow with the Forward Buying Rate.

Cash Flow of year n ( MYR) = Cash flow after Withholding Tax x Year n

Cash Flow of year 1 ( MYR) = Cash flow after Withholding Tax x Spot Rate Year 1

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= CAD 5.0803 million x MYR3.1965

= MYR 16.2392 million

Cash Flow of year 2 ( MYR) = Cash flow after Withholding Tax x Spot Rate Year 2

= CAD 6.0964 million x MYR3.2443

= MYR 19.7786 million

Cash Flow of year 3 ( MYR) = Cash flow after Withholding Tax x Spot Rate Year 3

= CAD 7.3157 million x MYR3.2928

= MYR 24.0891 million

Cash Flow of year 4 ( MYR) = Cash flow after Withholding Tax x Spot Rate Year 4

= CAD 8.7788 million x MYR3.3420

= MYR 29.3387 million

Cash Flow of year 5 ( MYR) = Cash flow after Withholding Tax x Spot Rate Year 5

= CAD 15.6149 million x MYR3.3920

= MYR 52.9657 million

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Step 6: Additionally, the project is expected to have a negative impact on the MNC’s

domestic cash flows due to lost exports from a competing older product line. The

negative impact is estimated to be MYR2 million per annum until the project is sold.

In order to calculate the negative impact from the project, we will deduct MYR 2 million from the

revenue generated back to Malaysia each year. (Show in the table below )

Net Cash Flow of Year n = Cash Flow of Year n ( MYR) + ( - Loss in Export (MYR))

where the n is number of year,

Net Cash Flow of Year 0 = - MYR 100 million

Net Cash Flow of Year 1 = Cash Flow of Year 1 ( MYR) + ( - Loss in Export (MYR))

= MYR 16.2392 million - MYR 2 million

= MYR 14.2392 million

Net Cash Flow of Year 2 = MYR 19.7786 million - MYR 2 million

= MYR 17.7786 million

Net Cash Flow of Year 3 = MYR 24.0891 million - MYR 2 million

= MYR 22.0891 million

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Net Cash Flow of Year 4 = MYR 29.3387 million - MYR 2 million

= MYR 27.3387 million

Net Cash Flow of Year 5 = MYR 52.9657 million - MYR 2 million

= MYR 50.9657 million

To check and decide whether to accept or reject the project from parent’s viewpoint, we will now

calculate the Net Present Value and IRR by using financial calculator.

I / YR = 12%

CF0 = - 100

CF 1= 14.2392

CF2 = 17.7786

CF3 = 22.0891

CF4 = 27.3387

CF5 = 50.97

NPV = - 11.0974

IRR = 8.232

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 CIC 2006 GLOBAL FINANCE

Year 0 1 2 3 4 5

Investment -CAD31.7521m

Expected CAD6.3504m CAD7.6205m CAD9.1446m CAD10.9735m CAD13.1682m

Operating Cash
Flow

Salvage Value CAD6.3504m

Net Cash Flow -CAD31.7521m CAD6.3504m CAD7.6205m CAD9.1446m CAD10.9735m CAD19.5186

(Before Tax)

Tax 20% 20% 20% 20% 20%

Net Cash Flow -CAD31.7521m CAD5.0803m CAD6.0964m CAD7.3157m CAD8.7788m CAD15.6149m

(After Tax)

Exchange Rate MYR3.1494/CAD MYR3.1965/CAD MYR3.2443/CAD MYR3.2928/CAD MYR3.3420/CAD MYR3.3920/CAD

Cash -MYR100m MYR16.2392m MYR19.7786m MYR24.0891m MYR29.3387m MYR52.9657m

Flow(Parent’s
Viewpoint)

Domestic Loss MYR2m MYR2m MYR2m MYR2m MYR2m

Net Cash Flow -MYR100m MYR14.2392m MYR17.7786m MYR22.0891m MYR27.3387m MYR50.9657m

(Parent’s
Viewpoint)

Present Value of -MYR100m MYR14.2392m/1.1 MYR17.7786m/ MYR22.089m/ MYR27.3387m/ MYR50.9657m/

Expected Cash 2=MYR12.7136 2 3 4
Flow (12%) 1.12 =MYR14.17 1.12 =MYR15.72 1.12 =MYR17.37 1.125=MYR28.91
30m 25m 42m 93m

NPV -MYR11.0974m

IRR 8.23043%

Since the NPV calculated amounted to -MYR11.0974m (¿ 0 ¿and IRR calculated is 8.23043%

which is less than the rate of return of 12%, therefore the company should not invest in the

parent’s viewpoint.

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Parent’s Viewpoint (Without Withholding Tax)

In order to calculate NPV and IRR of the project without including the withholding tax, we will

follow the same steps above but skip only the step 5. Below is the table without calculating the

withholding tax.

Now, we will calculate the amount of revenue that will be transferred back to parents’

company by multiplying the Net Cash flow with the Forward Buying Rate.

Cash Flow of year n ( MYR) = Cash flow after Without holding Tax x Year n

Cash Flow of year 1 ( MYR) = Cash flow after Without holding Tax x Spot Rate Year 1

= CAD 6.3504 million x MYR3.1965

= MYR 20.2991 million

Cash Flow of year 2 ( MYR) = Cash flow after Without holding Tax x Spot Rate Year 2

= CAD 7.6205 million x MYR3.2443

= MYR 24.7232 million

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Cash Flow of year 3 ( MYR) = Cash flow after Without holding Tax x Spot Rate Year 3

= CAD 9.1446 million x MYR3.2928

= MYR 30.1113 million

Cash Flow of year 4 ( MYR) = Cash flow after Without holding Tax x Spot Rate Year 4

= CAD 10.9735 million x MYR3.3420

= MYR 36.6734 million

Cash Flow of year 5 ( MYR) = Cash flow after Without holding Tax x Spot Rate Year 5

= ( CAD 13.1682 million + CAD 6.3504) x MYR3.3920

= MYR 66.2071 million

Step 6: Additionally, the project is expected to have a negative impact on the MNC’s

domestic cash flows due to lost exports from a competing older product line. The

negative impact is estimated to be MYR2 million per annum until the project is sold.

In order to calculate the negative impact from the project, we will deduct MYR 2 million from the

revenue generated back to Malaysia each year. (Show in the table below )

Net Cash Flow of Year n = Cash Flow of Year n ( MYR) + ( - Loss in Export (MYR))

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where the n is number of year,

Net Cash Flow of Year 0 = - MYR 100 million

Net Cash Flow of Year 1 = Cash Flow of Year 1 ( MYR) + ( - Loss in Export (MYR))

= MYR 20.2991 million - MYR 2 million

= MYR 18.2991million

Net Cash Flow of Year 2 = MYR 24.7232 million - MYR 2 million

= MYR 22.7232 million

Net Cash Flow of Year 3 = MYR 30.1113 million - MYR 2 million

= MYR 28.1113 million

Net Cash Flow of Year 4 = MYR 36.6734 million - MYR 2 million

= MYR 34.6734 million

Net Cash Flow of Year 5 = MYR 66.2071 million - MYR 2 million

= MYR 64.2071 million

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To check and decide whether to accept or reject the project from parent’s viewpoint, we will now

calculate the Net Present Value and IRR by using financial calculator.

I / YR = 12%

CF0 = - 100

CF 1= 18.30

CF2 = 22.72

CF3 = 28.11

CF4 = 34.67

CF5 = 64.21

NPV = 12.9308

IRR = 16.1368

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Year 0 1 2 3 4 5

Investment -CAD31.7521m

Expected CAD6.3504m CAD7.6205m CAD9.1446m CAD10.9735m CAD13.1682m

Operating Cash
Flow

Salvage Value CAD6.3504m

Net Cash Flow -CAD31.7521m CAD6.3504m CAD7.6205m CAD9.1446m CAD10.9735m CAD19.5186m

Exchange Rate MYR3.1494/CAD MYR3.1965/CAD MYR3.2443/CAD MYR3.2928/CAD MYR3.3420/CAD MYR3.3920/CAD

Cash -MYR100m MYR20.2991m MYR24.7232m MYR30.1113m MYR36.6734m MYR66.2071m

Flow(Parent’s
Viewpoint)

Domestic Loss -MYR2m -MYR2m -MYR2m -MYR2m -MYR2m

Net Cash Flow -MYR100m MYR18.2991m MYR22.7232m MYR28.1113m MYR34.6734m MYR64.2071m

(Parent’s
Viewpoint)

Present Value of -MYR100m MYR18.2991m/1.1 MYR22.7232m/ MYR28.1113m/ MYR34.6734m/ MYR64.2071m/

Expected Cash 2=MYR16.3385m
Flow (12%) 1.122=MYR18.11 1.123=MYR20.00 1.124 =MYR22.03 1.125=MYR36.43
48m 91m 56m 28

NPV MYR12.9308

IRR 16.1368%

Since the NPV calculated amounted to MYR12.9308m (¿ 0 ¿and IRR calculated is 16.1368%

which is more than the rate of return of 12%, therefore the company should invest in the

parent’s viewpoint.

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CONCLUSION

We can conclude that the Malaysian MNC should invest in this Greenfield investment in

Canada because in the point of view of the project this project generates a Net Present Value

(NPV) is CAD 4.5511million and Internal Rate of Return (IRR) is 16.667% which is we can see it

higher than the rate of return which is 12%. Thus, we will accept the project from the project’s

viewpoint. However, from analyses from the parent’s viewpoint which is from Malaysian MNC

perspective with withholding tax, since the Net Present Value (NPV) is calculated amounted to

-MYR11.0974 million and Internal Rate of Return (IRR) calculated is 8.23043% which is less

than the rate of return which is 12%, therefore the company should not invest in the parent’s

viewpoint and for the without withholding tax the Net Present Value (NPV) amounted to

MYR12.9308 million and Internal Rate of Return (IRR) calculated is 16.1368% which is more

than the rate of return which is 12%, therefore the company should invest in the parent’s

viewpoint.

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APPENDICES

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REFERENCES

Canada. (2020). Why Invest In Canada?

Retrieved from https://www.investcanada.ca/why-invest

Wikipedia. (2020). The Group of Seven (G7).

Retrieved from https://en.wikipedia.org/wiki/Group_of_Seven

Hayes, A. (2020, December 02). European Terms. Retrieved January 14, 2021, from
https://www.investopedia.com/terms/e/europeanterms.asp

Economics, T. (Producer). (2020). Interest Rate Asia. Retrieved from

https://tradingeconomics.com/country-list/interest-rate?continent=asia

Economics, T. (Producer). (2020). Interest Rate America. Retrieved from

https://tradingeconomics.com/country-list/interest-rate?continent=america

Bank Negara Malaysia. (2020). EXCHANGE RATES. Retrieved from

https://www.bnm.gov.my/exchange-rates

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