4) NMC (a U.S. firm) is considering investing Rs50,000,000 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. Sales revenue is projected to be Rs30,000,000 per year, operating expenses are projected to be Rs17,000,000 per year, and depreciation expenses Rs1,000,000 per year. 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 NMC from India will equal 75% of accounting income. The U.S. corporate tax rate is 40% and the Indian corporate tax rate is 50%. Because the Indian tax rate is greater than the U.S. tax rate, annual dividends paid to NMC will not be subject to additional taxes in the United States. There are no capital gains taxes on the final sale. NMC uses a weighted average cost of capital of 14% on domestic investments but will add 6 percentage points for the Indian investment because of perceived greater risk. NMC forecasts the rupee/dollar exchange rate for December 31st on the next six years are listed below. Expected exchange rates (in Rs/$) for December 31st on the next six years (2011 - 2016) are 50.00, 54.00, 58.00, 62.00, 66.00, and 70.00. What is the net present value and internal rate of return on this investment? 3:34 pm
4) NMC (a U.S. firm) is considering investing Rs50,000,000 in India to create a wholly owned tile manufacturing plant to export to the European market. After five years the subsidiary would be sold to Indian investors for Rs100,000,000. Sales revenue is projected to be Rs30,000,000 per year, operating expenses are projected to be Rs17,000,000 per year, and depreciation expenses Rs1,000,000 per year. The initial investment will be made on December 31, 2011, and cash flows will occur on December 31st of each succeeding year. Annual cash dividends to NMC from India will equal 75% of accounting income. The U.S. corporate tax rate is 40% and the Indian corporate tax rate is 50%. Because the Indian tax rate is greater than the U.S. tax rate, annual dividends paid to NMC will not be subject to additional taxes in the United States. There are no capital gains taxes on the final sale. NMC uses a weighted average cost of capital of 14% on domestic investments but will add 6 percentage points for the Indian investment because of perceived greater risk. NMC forecasts the rupee/dollar exchange rate for December 31st on the next six years are listed below. Expected exchange rates (in Rs/$) for December 31st on the next six years (2011 - 2016) are 50.00, 54.00, 58.00, 62.00, 66.00, and 70.00. What is the net present value and internal rate of return on this investment? 3:34 pm
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Transcribed Image Text:4) NMC (a U.S. firm) is considering investing
Rs50,000,000 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. Sales revenue
is projected to be Rs30,000,000 per year, operating
expenses are projected to be Rs17,000,000 per year,
and depreciation expenses Rs1,000,000 per year.
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 NMC
from India will equal 75% of accounting income.
The U.S. corporate tax rate is 40% and the Indian
corporate tax rate is 50%. Because the Indian tax rate
is greater than the U.S. tax rate, annual dividends
paid to NMC will not be subject to additional taxes in
the United States. There are no capital gains taxes
on the final sale. NMC uses a weighted average cost
of capital of 14% on domestic investments but will
add 6 percentage points for the Indian investment
because of perceived greater risk. NMC forecasts the
rupee/dollar exchange rate for December 31st on the
next six years are listed below.
Expected exchange rates (in Rs/$) for December
31st on the next six years (2011 - 2016) are 50.00,
54.00, 58.00, 62.00, 66.00, and 70.00. What is the
net present value and internal rate of return on this
investment?
3:34 pm
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