Tekmex, a U. S.- based MNC, is investigating a project in Pakistan. The cash flo

Question

Tekmex, a U. S.- based MNC, is investigating a project in Pakistan. The cash flow components are as follows (denominated in the local currency, Pakistani rupee, or PKR, thousands):
Year     Earnings before Taxes                         Depreciation
1          15,000 15,000
2          25,000 15,000
The initial investment in plant and equipment is PKR 30,000, and the pretax salvage value is PKR 6,000. Because the investment is fully depreciated in year 2, the liquidation of plant and equipment generates taxable capital gains. The Pakistani tax rate on income and capital gains is 22 percent. Assume that cash flows are repatriated as they occur and trigger no withholding taxes. Assume that the tax treaty between the United States and Pakistan allows for taxes in Pakistan to be claimed as a tax credit against U. S. taxes of 33 percent. If the appropriate discount rate is 11 percent, calculate the NPV to the subsidiary.

Explanation / Answer

Year EBT Tax EAT Depreciation Solvage Cash inflows 1 15000 3300 11700 15000 26700 2 25000 5500 19500 15000 6000 40500 PV factor Present Year Cashflow at 11% Value 0 -30000 1.00000 -30000 1 26700 0.90090 24054.054 2 40500 0.81162 32870.709 Total 37200 26924.76

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