13 1 1 1 Problem 18.4 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 Rs 100,000,000. A pro forma income statement for the Indian operation predicts net income after tax of Rs 6,000,000 including depreciation expense of Rs 1,000,000, thus generating Rs 7,000,000 annual cash flow. 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 current exchange rate is Rs 50 per USD; but the dollar is expected to appreciate against rupee by 4% per year. 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 6 percentage points for the Indian investment because of perceived greater risk What is the net present value and internal rate of return on this investment? Assumptions Values Assumptions Values Initial investment in India (RS) 50,000,000 Dividend distribution per year 75.00% Indian corporate tax rate 50.00% US corporate tax rate 40.00% Sale price in year 5 (Rs) 100,000,000 India risk premium to WACC 6.00% Natural Mosaic's WACC 14.00%