Compute the npv of the project to the us parent

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Reference no: EM1367469

A United State Company, has a subsidiary in Europe. it is deciding whether to invest $2 million of its (the parent company) funds in a 3 year project in Europe.

The after-tax cash flow to the subsidiary are estimated to be as follows (in euros)

Year 1 Euro 500,000
2 Euro 800,000
3 Euro 900,000
The entire cash flows of the subsidiary are remitted to the parent annually. There is no additional tax nor credit in the parent country.

The exchange rate today is euro 1/ $1.20. The exchange rate for the next 3 years are:
Year 1 euro 1/$1.15
Year 2 euro 1/$1.10
Year 3 euro 1/$1.05
The cost of capital for both the parent and the subsidiary is 13% percent
a. what is the NPV of the project to the Europe subsidiary?
b. What is the NPV of the project to the U. S. parent?
c. Should the project be accepted?

Reference no: EM1367469

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