TQ1. GULF COMPANY
Annual fixed costs (excluding depreciation), are forecast at TZS 80,000,000. As per agreement
Gulf Company is an Italian based manufacturer of radios. The company’s senior management
year’s after tax accounting profit. Cash remitted to Italy from the subsidiary is not taxable in
1400/Euro. Corporate tax in Tanzania is 30%, in Italy 40%. Tax is payable, and allowances are
TANZANIA 6%. The cost of capital for the company is 10%. The spot exchange rate is TZS
subsidiary would involve construction of a new factory in Dar es Salaam. The initial project
between Gulf Company and the authorities in Tanzania, depreciation expenses are not tax
investment and thus allows overseas investors to repatriate an annual cash dividend equal to that
per radio is estimated as follows:
market and wish to set up a manufacturing subsidiary in Tanzania. Setting up the Tanzanian
team has believed for several years that there is an opportunity to increase sales in the domestic
Working capital requirementsEuro 100,000
Production and sales are expected to be constant at 20,000 units per annum. The average price
Year 3:TZS 56,000
The variable cost ratio is forecast at 30% of the selling price and is expected to remain constant.
Fixed assetsEuro 900,000
cash investment is estimated at Euro 1,000,000 divided as follows:
Italy. The after tax realizable value of the investment in four years’ time is expected to be
Year 2:TZS 53,000
allowable. Inflation for each economy in the next four years is expected to be: ITALY 4%,
Year 1:TZS 55,000
Year 4:TZS 59,000
available, one year in arrears. The government of Tanzania is anxious to encourage foreign
approximately TZS 200 million.
Required:Evaluate whether Gulf Company should establish the Tanzanian Subsidiary
