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Is the project acceptable from the parent point of view

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Reference no: EM132955154

You are planning to open a 100% owned subsidiary in France. The following cash flows are projected for the next five years. The spot rate for the Euro is $1.10/€. The dollar is expected to appreciate 2% per year for the next five years. In other words, the exchange rates will be $1.078, $1.0564, $1.0353, $1.0146 and $0.9943 in the next five years.

Sales € 10,000,000
Variable Costs € 4,000,000
Administrative Cost € 1,000,000
Royalties € 2,000,000
Earnings before taxes € 3,000,000
Taxes € 600,000
Earnings after taxes € 2,400,000


Withholding Tax 8.00%
Overseas Corporate Tax 20.00%
US Tax 35.00%
Investment $10,000,000.00
Dividend rate 50.00%
Required return 16.00%

Problem 1: You expect to make dividend payments of 50% every year to the parent. Dividends repatriated to the U.S are subject to 8% 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 $10,000,000 in year 0, is the project acceptable from the parent's point of view? Assume the required rate of return on this project is 16%. The U.S. tax rate is 35%. Show all work for full credit.

Reference no: EM132955154

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