Why should capital budgeting be done from the point of view of the parent rather than the subsidiary? View the following data: Our Swiss subsidiary is looking at a project for the Nestles Corporation in Switzerland. The project is a five-year project at which time all assets will be turned over to Nestles. The investment now is CHF125,000,000. The current exchange rate is $.8000. The corporate tax rate is 25 percent and there are no additional taxes on money repatriated to the United States. Assume the U.S. corporate tax rate is also 25 percent, but the tax treaty allows for a full credit for taxes paid to the Swiss. The project is expected to bring in a cash flow before taxes of CHF 50,000,000 per year for the five years. The discount rate for the project is 18 percent. Our analysts forecast the following values of the Swiss Franc:

Yr 1 .8200

Yr 2 .8500

Yr 3 .8800

Yr 4 .9000

Yr 5 .9000

If we allow the subsidiary to decide whether to invest, what will be their decision? If we allow central decision-making, what will be their decision? Explain and discuss your results.