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corporate taxation Firm DFG plans to open a foreign subsidiary...

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Accounting

corporate taxation
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Firm DFG plans to open a foreign subsidiary through which to sell its manufactured goods in the European market. It must decide between locating the subsidiary in Country A or Country B. If the subsidiary operates in Country A, its gross receipts from sales will be subject to a 3 percent gross receipts tax. If the subsidiary operates in Country B, its net profits will be subject to a 42 percent income tax. However, Country B's tax law has a special provision to attract foreign investors: No foreign subsidiary is subject to the income tax for the first three years of operations. DFG projects the following annual operating results for the two locations (in thousands of dollars): DFG projects that it will operate the foreign subsidiary for 10 years (vears 0 through 9 ) and that the terminal value of the operation at the end of this period will be the same regardless of location. Assuming a 6 percent discount rate, determine which location maximizes the NPV of the foreign operation

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