Natural

Mosaic.

Natural Mosaic Company (U.S.) is considering investing

Rs58,000,000

in India to create a wholly owned tile manufacturing plant to export to the European market. After five years, the subsidiary would be sold to Indian investors for

Rs116,000,000.

A pro forma income statement for the Indian operation predicts the generation of

Rs10,500,000

of annual cash flow, is listed in the popup table,

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. The initial investment will be made on December 31, 2011, and cash flows will occur on December 31st of each succeeding year. Annual cash dividends to Natural Mosaic from India will equal

70%

of accounting income.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 Natural Mosaic will not be subject to additional taxes in the United States. There are no capital gains taxes on the final sale. Natural Mosaic uses a weighted average cost of capital of

16%

on domestic investments, but will add six percentage points for the Indian investment because of perceived greater risk. Natural Mosaic forecasts for the rupee/dollar exchange rate on December 31st for the next six years are listed in the popup table,

Rs/$
2011	50	2014		62
2012	54	2015		66
2013	58	2016		70

.

a. What is the net present value and internal rate of return on this investment from the project's viewpoint?

b. What is the net present value and internal rate of return on this investment from the parent's viewpoint?

a. Calculate the cash flows in Indian rupees for years 2011 through 2013 below:(Round to the nearest whole number.)

		2011		2012		2013
Annual cash flow (Rs)			Rs	10,500,000	Rs	10,500,000