Apex Tool Group, a US-based firm, is setting up a tool manufacturing firm in Honduras named Empresa. This will require an upfront investment of 400 million Honduran lempiras (Lp). Apex estimates that Empresa will generate a free cash flow of 200 million lempiras next year, and that this cash flow will grow at a constant rate of 10.0% per annum indefinitely. Empresa will pay the entire amount of its free cash flow as dividends to its parent company. In addition to dividends, Empresa will also pay 10 million lempiras each year as management fees to its parent company. The firm has a tax deal with the Honduran government according to which no taxes will be payable in Honduras for the foreseeable future. However, US federal income tax will be levied on all income received by Apex at a tax rate of 20%.

Further, Apex is planning on selling off the subsidiary to a Honduran business family at the end of year 5 for ten times the free cash flow in that year. Assume that no taxes will be payable on these proceeds.

The current spot exchange rate is Lp25.00/$. Inflation is expected to be 5% a year in Honduras and 2% a year in the US. Use relative PPP to project future exchange rates.

You need to carry out an analysis of this project from the viewpoint of the parent company, Apex Tool Group. Please compute project cash flows and the NPV of the project in US dollars taking the cost of capital to be 25%.