Question
Storm Corporation is considering an investment in Switzerland. They have the following information about the project: Initial investment required is CHF 25 million. The project's
Storm Corporation is considering an investment in Switzerland. They have the following information about the project:
Initial investment required is CHF 25 million.
The project's life is three years.
The price, demand, and variable cost of the product in Switzerland are as follows:
Year | Price | Demand | Variable cost |
1 | CHF 60 | 600,000 units | CHF 30 |
2 | CHF 65 | 550,000 units | CHF 35 |
3 | CHF 70 | 450,000 units | CHF 40 |
Fixed cost are estimated to be CHF 5 million per year.
Projected exchange rates are St=.50 USD/CHF, St+1F=.52 USD/CHF, St+2F=.55 USD/CHF, and St+3F=.60 USD/CHF.
The Swiss government imposes a tax of 20% on income. In addition, it will impose a 5% tax on earnings remitted by the subsidiary. The U.S. government does not impose any additional taxes.
All cash flows received by the subsidiary are to be sent to the parent company at the end of each year.
The Swiss government allows for a maximum depreciation of CHF 5 million per year.
The interest expense on local debt is 250,000.
Storm assesses that the salvage value of the investment is CHF 10 million. Assume that this amount is subject to withholding taxes.
Storm requires a 15% rate of return on this project (i.e., discount rate is 15%)
Should Storm accept this project? (Calculate NPV from the subsidiarys and parents point of view). Show your work
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