Question
Tekmex, a U. S.- based MNC, is investigating a project in Pakistan. The cash flow components are as follows (denominated in the local currency, Pakistani
Tekmex, a U. S.- based MNC, is investigating a project in Pakistan. The cash flow components are as follows (denominated in the local currency, Pakistani rupee, or PKR, thousands): Year Earnings before Taxes Depreciation 1 15,000 15,000 2 25,000 15,000 The initial investment in plant and equipment is PKR 30,000, and the pretax salvage value is PKR 6,000. Because the investment is fully depreciated in year 2, the liquidation of plant and equipment generates taxable capital gains. The Pakistani tax rate on income and capital gains is 22 percent. Assume that cash flows are repatriated as they occur and trigger no withholding taxes. Assume that the tax treaty between the United States and Pakistan allows for taxes in Pakistan to be claimed as a tax credit against U. S. taxes of 33 percent. If the appropriate discount rate is 11 percent, calculate the NPV to the subsidiary.
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