Bloomington Pharmaceuticals is a U.S. corporation considering where to locate a new manufacturing facility. The facility will require an investment of $50 million, and any profits during the n-year investment horizon will be reinvested in the facility and will earn the same pretax return as the original investment. After n years the facility will be sold for an amount equal to the cumulative investment in the facility, that is, the original investment and all of the reinvested earnings and profits. All the proceeds are repatriated to Bloomington Pharmaceuticals. Bloomington Pharmaceuticals has the possibilities narrowed down to three locations: Tucson, Arizona; Ireland; and Mexico. The pretax returns and local tax rates follow:

a. Suppose that the investment horizon is 5 years (n = 5). After paying any home-country tax due on repatriation, how much after-tax accumulation will Bloomington Pharmaceuticals have under each of the three location scenarios?
b. Suppose instead that the investment horizon is 15 years (n = 15). After paying any home-country tax due on repatriation, how much after-tax accumulation will Bloomington Pharmaceuticals have under each of the three location scenarios?
c. Make the same assumptions as in part b, but also assume the location decision is being made following a recession in the United States. Catering to protectionism sentiment among the electorate, Congress passes an anti-multinational tax law that greatly expands the scope of Subpart F to include, among other things, income from pharmaceutical facilities. How do your answers to part b change? Specifically, after paying any home-country tax due on repatriation, how much after-tax accumulation will Bloomington Pharmaceuticals have under each of the three location scenarios?

Transcribed Image Text:

Tucson Ireland Mexico Tax Rate 35% 10% 20% Pretax Return 20% 16% 18%