You have been assigned to evaluate a venture wherein your corporation will set up a foreign subsidiary in the developing nation of Aluvia. Aluvia is currently adopting cable television technology for the first time and will require your company to manufacture cable equipment locally for the right to sell in their internal market. The manufacturing venture is expected to last 5 years after which you will have saturated the local market. As the lead analyst on this project you have developed the following data:

Aluvian Currency: The current exchange is 5 Alots to the Dollar. The local inflation rate in Aluvia is expected to exceed the US inflation rate by 6% each year so the Alot will depreciate by 6% per year relative to the dollar.

Investment: The investment in Plant and Equipment will be $40 Million provided by your corporation as equity for this wholly owned subsidiary. At the end of the five year project, the assets will be liquidated for 10 Million Alots. All proceeds plus accumulated cash deposits will be repatriated as a liquidating dividend.

Repatriation: Only dividends may be repatriated from the subsidiary to the parent. Depreciation cash flows must be reinvested locally until the end of the project. An Aluvian Bank will provide a 15% per year tax-free return for this cash.

Taxes: Aluvian Tax Authority (ATA) has specified that your venture will be subject to a 30% corporate tax rate. You must use straight-line depreciation of plant and equipment over the five-year life. Dividends are not taxable in Aluvia. Your parent corporation combined Federal and State tax rate is 50% but you may claim a $ for $ credit for taxes paid in Aluvia offsetting US taxes due per the Tax Treaty between the US and Aluvia.

Marketing/Operating:Venture Fixed

Project Volume in Price Variable Cost Cash Cost

Year (1000) units Alots per unit, Alots Million Alots

1 70 7000 2500 100

2 80 6800 2600 110

3 90 6500 2700 120

4 100 6300 2800 130

5 120 6300 2900 140

If your firm requires a 25% investors return on projects of this type, should you make the investment?