Elvis Inc. is planning to establish a subsidiary in Australia to produce canola oil. The manufacturing facility will cost the parent company an initial investment of 5 million U.S. dollars (US$) to set up. The project will end in 3 years. At the end of the project, Elvis will sell the Australian subsidiary for A$8 million to an Australian agriculture firm. This amount is net of capital gain tax and is not subject to the withholding tax. Elvis estimates the after-tax net cash flows are A$6,400,000, A$3,000,000, and A$5,900,000 at the end of the first, second and third year, respectively. The Australian government will impose a corporate tax of 27% and a withholding tax of 19% on remitted funds. Additionally, the Australian law requires the subsidiary to operate locally at least for 3 years before it can remit earnings to its parent company. The parent's required rate of return for the Australian project is 10%. Suppose that the subsidiary can invest at 5% p.a. in Australia throughout the project duration and the exchange rate for the Australian dollar would remain unchanged at $0.141 throughout the project duration. Conduct a capital budgeting analysis to determine the feasibility of this project by completing the table below.

		Year 0	Year 1	Year 2	Year 3
1	Before-tax earnings of subsidiary (A$)
2	Host government tax (A$)
3	After-tax earnings of subsidiary (A$)
4	A$ Net cash flow to subsidiary
5	A$ remitted by subsidiary (100% of net cash flow)
	Reinvested fund from year 1
	Reinvested fund from year 2
5a	Accumulated A$
6	Withholding tax on remitted funds
7	A$ remitted after withholding tax
8	Salvage value
9	Exchange rate
10	Cash flows to parent
11	PV of parent cash flows
12	Initial investment (US$)
13	Cumulative NPV (US$)

Answer rating: 100% (QA)

Year 0 Year 1 Year 2 Year 3 1 Beforetax earnings of subsidiary A 8767123 4109589 8082... View the full answer