3. Kelleher Tile Company (KTC), a U.S. fim, is considering investing Rs 50,000,000 in India to create a wholly owned manufacturing plant to export to the European market. After five years the subsidiary would be sold to Indian investors for Rs 100,000,000 (obviously this salvage value is uncertain but we will assume it). This will occur along with the last year's operating cash flow (at =5). A pro forma income statement for the India operation is below. This forecast applies to each year. Pro forma income statement (December 31st) Sales revenue 30,000,000 Less cash operating expenses (17,000,000) Gross income 13,000,000 Less depreciation expenses (1,000,000) Earnings before interest and taxes 12,000,000 Less Indian taxes at 50% (6,000,000) Net income (NOPAT) 6,000,000 The initial investment will be made on December 31, 2014, and cash flows will occur on December 31 of cach succeeding year. (That is, we make the standard assumption that all cash flows are aggregated at the end of each year, except the initial investment.) Annual cash dividends to KTC from India will equal 75% of accounting income or NOPAT (note that this is 75% of accounting income, not India cash flow). 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 to TTC will not be subject to additional taxes in the U.S. (this is the way taxes work, the U.S.gives credit for taxes paid elsewhere). There are no capital gains taxes on the final sale (in either country) KTC has a dollar weighted average cost of capital (WACC) of 13.5% which they apply to average risk projects. This project is considered above average risk; for the additional risk the firm makes an ad hoc adjustment by adding 4% to its WACC. This produces the dollar project discount rate (project WACC). The current exchange rate is 50 Rs/$. Treasury interest rates are 5% in the US and 10% in India. The firm believes that these rates will be constant for the next five years, furthermore the firm uses IRP to forecast future exchange rates. I would like you to calculate the NPV and IRR from both the project (subsidiary) perspective (in Rupees) and the parent perspective (in dollars). Please use the home currency approach for the parent NPV and be sure to show all exchange rates and dollar cash flows. Notes: You will need to find the annual cash flows. You will have the same operating cash flow for each of the five years. You will need to find the Rupee (India) equivalent project WACC (discount rate). We are told that the terminal value (sale price in this problem) is not subject to tax so you can use the amount as is in year 5 (1-5). d. When you are doing the subsidiary or project perspective (in Rupees), all the cash flows matter (including the initial investment and salvage value). But the parent will only see the dividends (75% of accounting income (NOPAT) we are told). Plus they pay the entire investment and receive the entire sale price. The parent NPV should be presented in dollars. a. b. 3. Kelleher Tile Company (KTC), a U.S. fim, is considering investing Rs 50,000,000 in India to create a wholly owned manufacturing plant to export to the European market. After five years the subsidiary would be sold to Indian investors for Rs 100,000,000 (obviously this salvage value is uncertain but we will assume it). This will occur along with the last year's operating cash flow (at =5). A pro forma income statement for the India operation is below. This forecast applies to each year. Pro forma income statement (December 31st) Sales revenue 30,000,000 Less cash operating expenses (17,000,000) Gross income 13,000,000 Less depreciation expenses (1,000,000) Earnings before interest and taxes 12,000,000 Less Indian taxes at 50% (6,000,000) Net income (NOPAT) 6,000,000 The initial investment will be made on December 31, 2014, and cash flows will occur on December 31 of cach succeeding year. (That is, we make the standard assumption that all cash flows are aggregated at the end of each year, except the initial investment.) Annual cash dividends to KTC from India will equal 75% of accounting income or NOPAT (note that this is 75% of accounting income, not India cash flow). 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 to TTC will not be subject to additional taxes in the U.S. (this is the way taxes work, the U.S.gives credit for taxes paid elsewhere). There are no capital gains taxes on the final sale (in either country) KTC has a dollar weighted average cost of capital (WACC) of 13.5% which they apply to average risk projects. This project is considered above average risk; for the additional risk the firm makes an ad hoc adjustment by adding 4% to its WACC. This produces the dollar project discount rate (project WACC). The current exchange rate is 50 Rs/$. Treasury interest rates are 5% in the US and 10% in India. The firm believes that these rates will be constant for the next five years, furthermore the firm uses IRP to forecast future exchange rates. I would like you to calculate the NPV and IRR from both the project (subsidiary) perspective (in Rupees) and the parent perspective (in dollars). Please use the home currency approach for the parent NPV and be sure to show all exchange rates and dollar cash flows. Notes: You will need to find the annual cash flows. You will have the same operating cash flow for each of the five years. You will need to find the Rupee (India) equivalent project WACC (discount rate). We are told that the terminal value (sale price in this problem) is not subject to tax so you can use the amount as is in year 5 (1-5). d. When you are doing the subsidiary or project perspective (in Rupees), all the cash flows matter (including the initial investment and salvage value). But the parent will only see the dividends (75% of accounting income (NOPAT) we are told). Plus they pay the entire investment and receive the entire sale price. The parent NPV should be presented in dollars. a. b