Global Finance

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
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,
1
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.
2
● 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
3
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
4
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.
5
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
6
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 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.
7
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
8
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%
9
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.
10
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%
11
Net Cash flow after withholding tax (Year 2 ) = CAD 7.6205 million x 80%
Net Cash flow after withholding tax (Year 5 ) = ( CAD 13.1682 million + CAD 6.3504) x 80%
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
12
= CAD 5.0803 million x MYR3.1965
= MYR 16.2392 million
13
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
Net Cash Flow of Year 2 = MYR 19.7786 million - MYR 2 million
14
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
15
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.
16
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
17
= ( CAD 13.1682 million + CAD 6.3504) x MYR3.3920
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))
18
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
19
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
20
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.
21
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.
22
APPENDICES
23
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
24

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CIC 2006 GLOBAL FINANCE

2 Purchasing Power Parity(PPP) 4-6

3 Exchange Rates Calculation 6

4 Project’s Viewpoint 7-11

5 Parent’s Viewpoint 12-22

● Calculation with withholding tax and

● Calculation without withholding tax

Greenfield Investment in Canada

for human freedom.

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

International Capital Budgeting

A Malaysian MNC is considering a greenfield investment in Canada.

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

would attract a 20% withholding tax.

● A minimum return of 12% per annum.

PURCHASING POWER PARITY

American Terms to predict the Forward Buying Rate of MYR,

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

1 F=[3.1494 ×(1+0.0175)]/(1+ 0.0025)

2 F=[3.1965 ×(1+ 0.0175)]/(1+0.0025)

3 F=[3.2443 ×(1+ 0.0175)]/(1+0.0025)

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

American terms with MYR as home currency

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

European terms with MYR as home currency

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

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

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

conversion of MYR into CAD.

20% of the project cost in the first year.

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

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

for the project.

Salvage Value = Initial cost of project × 20%

Salvage Value = CAD 31.7521 million x 20%

Salvage value = CAD 6.3504 million

Using the PV formula;

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

Salvage Value CAD31.7521m(0.2)

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/

will accept the project from the project’s viewpoint.

Parent’s Viewpoint (With Withholding Tax)

older product line.

project, would attract a 20% withholding tax.

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