• Question 1 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 A or Country B. If the subsidiary operates in Country A, its gross receipts from sales will be subject to a 3 percent gross receipts tax. If the subsidiary operates in Country B, its net profits will be subject to a 42 percent income tax. However, Country B’s 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 A Country B Gross receipts from sales $220,000 $220,000 Cost of sales (120,000) (120,000) Operating expenses (44,000) (30,000) Net profit $ 56,000 $ 70,000 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 6 percent discount rate, determine which location maximizes the NPV of the foreign operation.