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):

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. Assuming a 5 percent discount rate, determine which location maximizes the NPV of the foreign operation.