A U.S.-based MNC is considering establishing a three-year project in Australia

with a US$55 million initial investment.

The firm's cost of capital is 13% and if its takes on this project its cost of capital

will be increased to 15%.

The required rate of return on this project is 18%.

The life of the project is three years and it is expected to generate cash flows of

A$20 million in Year 1, A$35 million in Year 2, and 40 million in year 3. The

project is expected to have a salvage value of AS10 million which will not be

subjected to any taxes including capital gains tax.

Assume a corporate tax rate of 20%, and exchange rates of $0.70, $0.73 and $0.71

per AS for year 1, year 2 and year 3 respectively.

All cash flows are remitted to the parent.

Required:

i)

What are the net after tax cash flows generated by the project in Australian

dollars in years 1, 2 and 3.

(3 marks)

Calculate the USS cash flows remitted to the parent company each year over

the life of the project.

(3 marks)

in) Calculate present values of the USS cash flows to the parent. (9 marks)

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iv) Calculate the Net Present Value of the project.

v)

Calculate the break-even salvag value of the project.

Should the project be accepted? Justify your response.