Beach FashionCompany(U.S.) is considering investing Rs60,000,000 inIndia to invent a wholly-owned clothingmanufacturing plant to export to the North American 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 below for years 2017 to 2021.

The initial investment will be made on December 31, 2016, and cash flows will occur on December 31 of each succeeding

year. Annual cash dividends to Beach Fashion from India will equal 75% of net income.Depreciation is not repatriated.

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 Beach Fashion will not be subject to additional taxes in the United States. There are

no capital gains taxes on the final sale. Beach Fashion uses a weighted average cost of capital of 14% on domestic investments,

but will add 6% for the Indian investment because of perceived greater risk (20% for both the project and parent analysis).

The company forecasts the rupee/dollar exchange rate for December 31 on the next six years are listed below:

2016 R50/$, 2017 R54/$, 2018 $58/$, 2019 R62/$, 2020 R66/$, 2021 R70/$

What is the net present value and internal rate of return on this investment from both the project and parent viewpoint?

Assumptions

Values

Initial investment in India (Rs)

Rs60,000,000

Indian corporate tax rate

50.00%

Sale price in year 5 (Rs)

100,000,000

WACC: (14% + 6%=20%)

20.00%

Assumptions

Values

Dividend distribution per year

75.00%

US corporate tax rate

40.00%

India risk premium to WACC

6.00%

Pro forma income and cash flow

Year 0

Years 1-5

(December 31^stin Rs)

2016

2017-21

Sales revenue

Rs

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