HydroRUs Canada, a Canadian MNE producing small hydro power generators, is trying to decide whe er to establish a manufacturing facility in France. HydroRUs expects to significantly boost its European sales of small generators from the $20,000$ it is currently exporting there.

As an inducement to locate in the vacant plant and thereby ease unemployment in Orleans, the French National Enterprise Board $($NEB$)$ will provide a $5-$year loan of $5$ million euros $($or $C$$$10$ million at the current spot rate of $C$$$\frac{2}{?}$ euro$)$ at $0\%$ interest rate with the principal to be repaid in a lump sum at the end of the fifth year.

The total acquisition, equipment, and retooling costs for this plant are estimated to equal $C$$$50$ million. This will be depreciated on a straight$-$line basis over a $5-$year period, with zero salvage value. Of the $C$$$50$ million in net plant and equipment costs, $C$$$10$ million will be financed by NEB's interest$-$free loan of $5$ million euros $($see above$).$ The remaining $C$$$40$ million will be supplied by the parent in the form of equity capital.

Working capital requirements $-$ comprising cash, accounts receivable, and inventory are estimated at $30\%$ of sales, but this amount will be partially offset by accounts payable to local firms, which are expected to average $10\%$ of sales. Therefore, net investment in working capital will equal approximately $20\%$ of sales.

The following table presents the expected annual units produced, the price per unit $($euro$,$ E$),$ the variable cost per unit $($E$),$ and the exchange rate $(C$$ per unit of euro, E$)$ over the $5-$year period:

$\backslash$table$[[$Year$,0,1,2,3,4,5],[$Units$,,30,000,66,000,73,000,80,000,88,000],[$Price $($E$),250,278,308,342,380,],[\backslash$table$[[$Variable$],[$cost per unit$],[($E$)]],140,147,154,162,170,],[\backslash$table$[[$Exchange$],[$rate $($$$/$E$)]],2\mathrm{.}0000,1,96,1\mathrm{.}92,1\mathrm{.}89,1\mathrm{.}85,1\mathrm{.}82]]$

In addition to depreciation and variable cost, the French subsidiary will be charged by the parent the license fees and royalties annually, set at $7\%$ of annual sales revenue.

In addition to depreciation and variable cost, the French subsidiary will be charged by the parent the license fees and royalties annually, set at $7\%$ of annual sales revenue. The overhead expenses assigned from the parent are estimated to be E$600,000,$ E$1\mathrm{.}2$ million, E$1\mathrm{.}3$ million, E$1\mathrm{.}4$ million, and E$1\mathrm{.}5$ million for the $5-$year period.

The effective tax rate on corporate income faced by the French subsidiary in France is estimated to be $40\%,$ however, no tax will be levied on loss and loss can be applied against income in the following years, reducing corporate taxes owed in the following years. The French subsidiary is projected to pay dividends equal to $100\%$ of its remaining net cash flows after making all necessary loan repayments. At the end of the $5-$year period, the Canadian parent is expected to sell the facility to a local investor and receive E$19$ million $($the net amount after repaying the loan and paying all taxes and fees$).$

Approximately $30\%$ of the total amount of materials used in the French manufacturing process comes from the Canadian parent. The remaining components will be purchased locally. Costs of both sources of materials have been included in the above variable cost estimates for the project. The Canadian parent's annual net cash flows from exporting its materials to the project are $C$$$300,000,C$$$700,000,C$$$800,000,C$$$900,000,$ and $C$$$1$ million for the $5-$year period.

In addition to depreciation and variable cost, the French subsidiary will be charged by the parent the license fees and royalties annually, set at $7\%$ of annual sales revenue. The overhead expenses assigned from the parent are estimated to be $E600,000,$ E$1\mathrm{.}2$ million, E$1\mathrm{.}3$ million, E$1\mathrm{.}4$ million, and E$1\mathrm{.}5$ million for the $5-$year period.

The effective tax rate on corporate income faced by the French subsidiary in France is estimated to be $40\%,$ however, no tax will be levied on loss and loss can be applied against income in the following years, reducing corporate taxes owed in the following years. The French subsidiary is projected to pay dividends equal to $100\%$ of its remaining net cash flows after making all necessary loan repayments. At the end of the $5-$year period, the Canadian parent is expected to sell the facility to a local investor and receive E$19$ million $($the net amount after repaying the l