Parrott Co Solution - Parrott Co is a UK based company It...

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Parrott Co is a UK based company. It is considering a 3-year project in Farland. The project will require an initial investment of 81m Farland Florins (FFI) and will have a residual value of 10m FFI. The project’s pre-tax net FFI inflows are expected to be: Year 1 35m Year 2 80m Year 3 50m The UK parent company will charge the overseas project with £2m of management charges each year. The current spot rate is 5FFI – £1. UK inflation is expected to be 4% per annum, and Farland inflation is expected to be 7% per annum. Farland tax is 20% and is paid immediately. Any losses are carried forward and netted off the first available profits for tax purposes. Tax allowable depreciation will be granted on a straight line basis, and any residual value will be taxable at 20%, UK tax is 30% and is payable 1 year in arrears. Parrott Co recently undertook a similar risk project in the UK and used 11% as a suitable discount rate.
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