Institute of Chartered Financial Analysts of India (ICFAI) University 2006 Certification Finance International and Trade - II - Question Paper

Year
1
2
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6

Capacity utilization (%)
65
70
80
90
90
90


At 65% capacity utilization, the sales revenue at the current prices is estimated at Can $ 150 million. The pharmaceutical company presently exports pharmaceuticals worth Can $30 million annually to the Canadian states. If this project is implemented those exports will cease to exist. The net profit margin on those exports is 15%, net profit expected to grow to keep pace with the inflation rate in Canada.

The company has accumulated fund of Can $ 110 million in different banks in Canada. This can be repatriated in India after paying 35% tax to the Canadian government. If the investment is not made in Canada, the accumulated funds at a few point of time would have been transferred to India, as nothing better could have been done with them.

The life of the project can be taken as 6 years for appraisal purposes. The value of fixed assets if sold after 6 years can realize 8% of the initial investment in plant and machineries and other facilities and working capital margin can be realized at the full amount of initial injection.

The product mix is expected to remain identical throughout and the contribution is expected to be the 30% of sales. The fixed cost excluding depreciation for the 6 years of operation is estimated at Can $ 40 million at the current prices. All the revenues and costs will go up according to the inflation rate in Canada.

The initial investment in plant and machineries and in other facilities is to be depreciated over the 6 year period on straight line basis.

The investment would increase the borrowing capacity of the company in India by Rs.1000 million. The Government of Canada has also offered a concessional loan of Can $ 65 million at 13%, the similar loan is available at 15% in Canada. The rest of the amount will be financed through the own funds generated in India. The concessional loan will be repayable in 4 equal installments starting at the end of 2nd year. The company faces a borrowing rate of 11.5% in India. The risk free rate in India and Canada are 7% and 5% respectively.

The effective corporate income tax rate in Canada is 35%, while in India it is 25%. There is a double tax avoidance treaty ranging from India and Canada under which full credit is provided to Indian companies for taxes paid in Canada, provided, the rate does not exceed the Indian rate of 25%. Also Indian and Canadian authorities are vigilant enough to ensure that transfer prices are not manipulated to decrease tax liability.

Earning:   Approval pending.