Question: Echo Inc which has a 35 percent U S tax rate
Echo Inc., which has a 35 percent U.S. tax rate, plans to expand its business into Country J. It could open a branch office, or it could create a foreign subsidiary in Country J. The branch office would generate $5,000,000 income in year 0. The foreign subsidiary would incur incremental legal costs and, as a result, would generate only $4,750,000 income in year 0. This income would be taxed at Country J’s 18 percent corporate rate. Echo plans to defer repatriation of the subsidiary’s year 0 after-tax earnings until year 4. Assuming a 6 percent discount rate, should Echo open the branch office or form the subsidiary to maximize the NPV of the year 0 foreign source income?
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