A German company is considering opening a branch in Saudi Arabia. The initial investment cost is 35 million Saudi riyals

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A German company is considering opening a branch in Saudi
Arabia. The initial investment cost is 35 million Saudi riyals, and
the estimated value of the scrap is 20 million riyals. The expected
life of the project is 5 years. The expected order quantity is
80,000 units per year. And office rental expenses are 2 million
riyals annually. And other fixed expenses million riyals annually.
The annual depreciation premium is 3 million riyals. The tax rate
on income earned in the Saudi branch is 20%. 80% of the profits are
transferred to the parent company, and the tax rate on transfers is
15%. The weighted cost of capital is 18%. Also:
Years
5
Years
4
Years
3
Years
2
Years
1
Statement
1500
1400
1300
1250
1200
Estimated selling price per unit
(SAR)
1000
950
900
825
800
Variable cost per unit (SAR)
Relying on the previous data, calculate the net present
value and the internal rate of return using Excel with a comment on
the results to show whether the project should be accepted or not,
assuming the stability of the exchange rate of the riyal against
the euro in all years (assuming the exchange rate number from
you).
Q What is the impact of the following events on the NPV and
the internal rate of return?
Indicate your answer using Excel, then comment on the results to
justify the answers:
1. The rise in the exchange rate of the riyal against the euro
every year (assuming the exchange rate figures from you)
2. The decline in the exchange rate of the riyal against the euro
every year (assuming the exchange rate figures from you).
3. Purchasing offices equivalent to 10 million riyals with a
transfer from the parent company instead of renting them, and
selling the offices as scrap with a book value of 5.3 million
riyals at the end of the life of the project. With the use of the
straight-line method in calculating the premium for office
depreciation.
4. Purchasing offices equivalent to 10 million riyals with a loan
from a Saudi bank at an interest rate
5% instead of renting it, and selling the offices as scrap with a
book value of 5.3 million riyals at the end of the project's life.
With the use of the straight-line method in calculating the premium
for office depreciation.

5. Freezing funds throughout the life of the project, provided that
all funds are transferred to the parent company in Germany at the
end of the project life after 5 years, bearing in mind that the
rate of reinvestment in the host country is 8%.
6. The German company's exports to Saudi Arabia, amounting to 3
million euros annually, stopped when the project was
established.
Q Calculate the break-even scrap value with a comment on
the result.
Q Use the Scenario Manager analysis in Excel to compare the base
case and the following three cases:
1. Raising the tax rate on transfers to 25%.
2. Decreased scrap value to 10 million riyals.
3. An increase in the tax on transfers to 25% and a decrease in the
scrap value to 10 million riyals.