The Great Computer Company, a U.S. corporation, has a subsidiary in the Netherlands. It is deciding whether to invest $2 million of its (the parent's) funds in a 3-year project in the Netherlands.
The after tax cash flows to the subsidiary are estimated to be as follows (in Euros):
Year 1................€500,000
2........................800,000
3........................900,000
The Multinational Corporation in a Global Setting
The entire cash flows of the subsidiary arc remitted to the parent annually. There is no additional tax (noncredit) in the parent country.
The exchange rate today is €1/$1.20. The exchange rate forecast for the next 3 years is the following:
Year l...................€1/$1.15
2.........................€1/$1.10
3........................€ 1/$1.05
The cost of capital for both the parent and the subsidiary is 13 percent.
a. What is the NPV of this project to the Netherlands' subsidiary?
b. What is the NPV of this project to the U.S. parent?
c. Should the project be accepted?