Reference no: EM133001310

You are considering opening a subsidiary in Vietnam. The following cash flows areprojected for the next five years. The spot rate for the Dong is $0.14/VND. The exchange rate is expected to remain the same for the foreseeable future.

Sales     VND 1,000,000,000 
Variable Costs   VND 600,000,000 
Fixed Costs   VND 100,000,000 
Royalties   VND 100,000,000 
Earnings before taxes   VND 200,000,000 
Taxes 20%  VND 40,000,000 
Earnings after taxes   VND 160,000,000

You expect to make dividend payments of 75% every year to the parent. Dividends repatriated to the U.S are subject to 5% withholding tax. Royalties sent back to the parent should be considered as cash flows from the parent's perspective.

If the total investment from the parent company is $60,000,000 in year 0, is the project acceptable from the parent's point of view?

Assume the required rate of return on this project is 18%. The U.S. tax rate is 40%.