Firm DFG plans to open a foreign subsidiary through which to sell its manufactured goods in the European market. It must decide between locating the subsidiary in Country X or Country Z. If the subsidiary operates in Country X, its gross receipts from sales will be subject to a 3 percent gross receipts tax. If the subsidiary operates in Country Z, its net profits will be subject to a 42 percent income tax. However, Country Zs tax law has a special provision to attract foreign investors: No foreign subsidiary is subject to the income tax for the first three years of operations.

DFG projects the following annual operating results for the two locations (in thousands of dollars): Use Appendix A and Appendix B.

	Country X	Country Z
Gross receipts from sales	$ 110,000	$ 110,000
Cost of sales	(60,000)	(60,000)
Operating expenses	(22,000)	(15,000)
Net profit	($ 28,000)	$ 35,000

DFG projects that it will operate the foreign subsidiary for 10 years (years 0 through 9) and that the terminal value of the operation at the end of this period will be the same regardless of location. Assume a 5 percent discount rate.

Required:

1. Determine the NPV of Country X.
2. Determine the NPV of Country Z.
3. Which location maximizes the NPV of the foreign operation?