Introduction

Report on proposed subsidiary company

His report considers whether or not to set up a company in country C. It includes: financial evaluation, discuss assumptions in evaluation, other non-financial risk and issues.

recommendation is made on its acceptance.

Financial analyse:

Base on the following assumptions

Assumptions

1. Assuming all estimated variables are accurate. But the considerable uncertainty, and they are only the best guess. Sensitivity and scenario analysis may provide more useful information and aid with decision making process.

2. Assuming there is no additional tax payable in US on the second year profit.THere is biliteral tax treaty, but no tax is paid in host country in the second year.

3. Asusming no residual value of land, building and machinery.

   BUt non-current assets will be disposed at end of project life and the cash inflow increase NPV.

4. Assuming project life is 4 years. But if it is longer than that, NPV will be more.

5. Assuming negotiation with host country government will be successful, transfer price and royalty will be more. BUt is may not be realistic.

6. Assuming cost of caital is 10%. we need to know how it is determined.

7. Assuming the company will be build in A area and production can be started immediately. But there could be possible delay, the company should investigate whether there is any uncertianties.

8. Future exchange rate only reflect the differential of inflation rate between different countries. But in reality exchange rate are affected by other factors, such as governement invtervention.

Risk and other issues.

1.   Political risk

   Unstable governement

   Current political party is not popular in rural area. The company  sould assesshow likely the government change in future and its impact on the investment profect.

   Whether or not hte tranfer price and royalty fees will be increased, if not, nore tax will be paid in host country whether the net cash can be remitted back to USD?

2. Reputation risk 

   The company will be build on A area and all people will be relocated and incurred extra transport costs for them. THis may have negative impact on the company's reputation and image and may be contrary tothe company's ethical value.

3. Culture risk

   The wya of doing business in host country may be different . So the company has to give local employees substantial training.

4. Fiscal and regulatory risk

   THe company should assess the likelyhood of future change in tax rate, and legal and regulatory environment. Set up strategy to mitigate its impact on the project.

5. Operational risk 

   Consider and mitigate the operational risk , such as control of products quality.

6. Other real options

   Assess the alternative real options:

   -whether licensing will be more financially viable

   -consider invest in other countries

   -whether project can be abandoned if circumstances changed

   -whether this investment will bring other business opportunity in Y country?

Recommendation

The financial projectin shows positive NPV, this project is financially acceptable.

Further investigation and analysis will be required:
-assessimg risk and uncertainty using sensitivity and scenario anyalysis.

-Assess other real options

also consider other non-financial issues, such as 

-political risk

-culture risk

-ethical and reputation risk

A comprehensive decision is made on the basis of all above anyalysis.