*1. Answer Natural Mosaic. It is found on page 541, and it is number 4.. Do both the project and the parent points of view.

(What happens to the npv of the project, if the rupee devalues?)

Natural Mosaic. Natural Mosaic Company (U.S.) 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. 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: 30,000,0000

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 Natural Mosaic 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 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 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 on December 31st for the next six years as listed below.

R$/$ R$/$

2011 50 2014 62

2012 54 2015 66

2013 58 2016 70

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