Natural Mosaic Company (U.S.) is considering investing Rs 42,000,000 in India to create a wholly owned tile manufacturing plant to export to the European market. After 6 years, the subsidiary would be sold to Indian investors for Rs 10,000,000.
1. Expected sales of the Indian operation in the first year Rs 25,000,000 and it is expected to grow at 5% per year.
2. Direct cost of manufacturing will equal 45% of sales and fixed cost is Rs 2,000,000. All costs are incurred locally.
3. Capital investment will be depreciated straight line for six years.
4. Rs3,000.000 investment will be needed for working capital
5. The exchange rate in the first year of investment is Rs40/$ and it is expected to increase at 2 percent per year.
6. Indian tax rate is 30% and the U.S. tax rate 35%
7. All accounting profits from the subsidiary as well as terminal value may be repatriated to the U.S. at the end of each year.
8. Natural Mosaic's discount rate is 12%
(A) Is the proposed project, as given, worthwhile from the project point of view?
(B) Is the proposed project, as given, worthwhile from the parent's point of view?