Stark Inc. is a US-based firm, and is considering a project for one of its foreign subsidiaries in the U.K.  The project has an initial fixed asset cost of £300,000 which will be depreciated straight-line to a zero book value over the 3-year life of the project.  The fixed asset will be worthless at the end of the project.  Each year, the company will reduce its operating costs by £200,000.  Assume the U.S. uses a worldwide tax approach and the U.K. uses a territorial approach, and the US applies a foreign tax credit system.

Spot rate ($ per £)	1.40
1 year forward rate	1.37
WACC in dollars	12.54%
Risk free rate (US)	2.00%
Risk free rate (UK)	4.23%
U.K. tax rate	30.00%
Withholding tax	5.00%
U.S. tax rate	40.00%

 

a.  Using the information above, what is the project's NPV from the subsidiary's viewpoint?

b.  Using the information above, what is the project's NPV from the parent's viewpoint if they remit all their earnings?

Answer rating: 100% (QA)

a To calculate the projects NPV from the subsidiarys viewpoint we need to find the present value of the cash flows generated by the project discounted ... View the full answer