You are planning to open a 100% owned subsidiary in

You are planning to open a 100% owned subsidiary in France. The following cash flows are projected for the next five years. The spot rate for the Euro is $1.10/€. The dollar is expected to appreciate 2% per year for the next five years.

Sales                                                 € 10,000,000
Variable Costs                                € 4,000,000
Administrative Cost                      € 1,000,000
Royalties                                         € 2,000,000
Earnings before taxes                   € 3,000,000
Taxes                                               € 600,000
Earnings after taxes                      € 2,400,000

Withholding Tax                            8.00%
Overseas Corporate Tax               20.00%
US Tax                                             35.00%
Investment                                     $10,000,000.00
Dividend rate                                  50.00%
Required return                              16.00%

You expect to make dividend payments of 50% every year to the parent. Dividends repatriated to the U.S are subject to 8% withholding tax. Royalties sent back to the parent should be considered as cash flows from the parent’s perspective. If the total investment from the parent company is $10,000,000 in year 0, is the project acceptable from the parent’s point of view? Assume the required rate of return on this project is 16%. The U.S. tax rate is 35%. Show all work for full credit.