Reference no: EM133344893
Question: Natural Mosaic.Natural Mosaic Company (U.S.) isconsidering investing Rs50,000,000 in India to createa wholly owned tile manufacturing plant to export tothe European market. After five years, the subsidiarywould be sold to Indian investors for Rs100,000,000. Apro forma income statement for the Indian operationpredicts the generation of Rs7,000,000 of annual cashflow, is listed in the following table.The initial investment will be made on December31, 2011, and cash flows will occur on December 31of each succeeding year. Annual cash dividends toPhiladelphia Composite from India will equal 75% ofaccounting income.The U.S. corporate tax rate is 40% and the Indian cor-porate tax rate is 50%. Because the Indian tax rate isgreater than the U.S. tax rate, annual dividends paid toNatural Mosaic will not be subject to additional taxesin the United States. There are no capital gains taxeson the final sale. Natural Mosaic uses a weighted aver-age cost of capital of 14% on domestic investments,but will add six percentage points for the Indian invest-ment because of perceived greater risk. Natural Mosaicforecasts the rupee/dollar exchange rate for December31 on the next six years are listed on the next page.What is the net present value and internal rate ofreturn on this investment?
| Sales revenue |
30,000,000 |
| Less cash operating expenses |
(17,000,000) |
| Gross income |
13,000,000 |
| Less depreciation expenses |
(1,000,000) |
| Earnings before interest and taxes |
12,000,000 |
| Less Indian taxes at 50% |
(6,000,000) |
| Net income |
6,000,000 |
| Add back depreciation |
1,000,000 |
| Annual cash flow |
7,000,000 |
The initial investment will be made on December31, 2011, and cash flows will occur on December 31of each succeeding year. Annual cash dividends toPhiladelphia Composite from India will equal 75% ofaccounting income.The U.S. corporate tax rate is 40% and the Indian cor-porate tax rate is 50%. Because the Indian tax rate isgreater than the U.S. tax rate, annual dividends paid toNatural Mosaic will not be subject to additional taxesin the United States. There are no capital gains taxeson the final sale. Natural Mosaic uses a weighted aver-age cost of capital of 14% on domestic investments,but will add six percentage points for the Indian invest-ment because of perceived greater risk. Natural Mosaicforecasts the rupee/dollar exchange rate for December31 on the next six years are listed on the below.
R$/$ |
|
R$/$ |
| 2011 |
50 |
2014 |
62 |
| 2012 |
54 |
2015 |
66 |
| 2013 |
58 |
2016 |
70 |
What is the net present value and internal rate ofreturn on this investment?