Problem 18-4 Natural Mosaic. Natural Mosaic Company (U.S.) is considering investing Rs50,000,000 in India to create a wh

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Problem 18-4 Natural Mosaic. Natural Mosaic Company (U.S.) isconsidering investing Rs50,000,000 in India to create a whollyowned tile manufacturing plant to export to the European market.After five years, the subsidiary would be sold to Indian investorsfor Rs100,000,000. A pro forma income statement for the Indianoperation predicts the generation of Rs7,000,000 of annual cashflow, as listed in the following table. Sales revenue Less cashoperating expenses Gross income Less depreciation expenses Earningsbefore interest and taxes Less Indian taxes at 50% Net income Addback depreciation Annual cash flow 2011 2012 2013 RS/$ 50 54 582014 The initial investment will be made on December 31, 2011, andcash flows will occur on December 31st of each succeeding year.Annual cash dividends to Philadelphia Composite from India willequal 75% of accounting income. The U.S. corporate tax rate is 40%and the Indian corporate tax rate is 50%. Because the Indian taxrate is greater than the U.S. tax rate, annual dividends paid toNatural Mosaic will not be subject to additional taxes in theUnited States. There are no capital gains taxes on the final sale.Natural Mosaic uses a weighted average cost of capital of 14% ondomestic investments, but will add six percentage points for theIndian investment because of perceived greater risk. Natural Mosaicforecasts on the rupee/dollar exchange rate as of December 31st forthe next six years are listed next. 2015 30,000,000 2016(17,000,000) 13,000,000 (1,000,000) 12,000,000 (6,000,000)6,000,000 1,000,000 7,000,000 RS/S 62 66 70 What are the netpresent value and internal rate of return on this investment?