What is the net present value and internal rate of return

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Reference no: EM133139414

Question 1. Natural Mosaic company (U.S.) is considering investing Rs.50,000,000 in India to create a wholly owned tile manufacturing plant to export to the European Market. After five years, the subsidiary would be sold to Indian investors for Rs100,000,000. A pro forma income statement for the Indian operation predicts the generation of Rs7,000,000 of annual cash flow, is listed in the following table:

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 December 31, 2011, and cash flows will occur on December 31st of each succeeding year. Annual cash dividends to Philadelphia Composite from India will equal 75% of accounting income.

The US corporate tax rate is 40% and the Indian corporate tax rate is 50%. Because the Indian tax rate is greater than the US tax rate, annual dividends paid to Natural Mosaic will not be subject to additional taxes in the United States. There are no capital gains taxes on the final sale. Natural Mosaic uses a weighted average cost (WAC) of capital of 14% on domestic investments but will add six percentage points for the Indian investment because of perceived greater risk. Natural Mosaic forecasts the rupee/dollar exchange rate for December 31st on the next six years are listed below:

Rs $

2011 50

2012 54

2013 58

2014 62

2015 66

2016 70

What is the net present value and internal rate of return on this investment?

Question 2. How would the result of the above problem alters, if we additionally had sales from India to China, and the renminbi revalues against the rupee by 10% yearly for the next 15 years? Presuppose the volume of sales in China are double what they are in India in the beginning. Also, presuppose the price elasticity of demand is - 3 for the product in China. Presuppose secondly the expenses are incurred in rupees. Also, you are given that the expenses rise in rupees in the next 15 years (since the rupee devalues), but they rise only by half of the devaluation.

Reference no: EM133139414

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