18.6 Wenceslas Refining Company. Privately owned Wenc- eslas Refining Company is considering investing in the Czech Republic so as to have a refinery source closer to its European customers. The original investment in Czech korunas would amount to K250 million, or $7,692,309 at the current spot rate of K32.50/$, all in fixed assets, which will be depreciated over 10 years by the straight-line method. An additional K100,000,000 will be needed for working capital. For capital budgeting purposes, Wenceslas assumes sale as a going concern at the end of the third year at a price, after all taxes, equal to the net book value of fixed assets alone (not including working capital). All free cash flow will be repatriated to the United States as soon as possible. In evaluating the venture, the U.S. dollar fore- casts are shown in the previous table. Variable manufac- turing costs are expected to be 50% of sales. No additional funds need be invested in the U.S. subsidiary during the period under consideration. The Czech Republic imposes no restrictions on repatriation of any funds of any sort. The Czech corporate tax rate is 25% and the United States rate is 40%. Both countries allow a tax credit for taxes paid in other countries. Wenceslas uses 18% as its weighted average cost of capital, and its objective is to maximize present value. Is the investment attractive to Wenceslas Refining? 2 3 Problem 18.6: Wenceslas Refining Company Wenceslas Refining Company Project Viewpoint in US$) Original investment (Czeckh korunas, K) Spot exchange change (K/S) Unit demand Unit sales price Fixed cash operating expenses Depreciation Investment in working capital (K) 2,500,000,000 32.50 30.00 700,000 $ 10.00 $1,000,000 $ 7,692,309 2750 900,000 $ 10.30 $ 1,030,000 $ 7692,309 25.00 1,000,000 $10.60 $ 1,060,000 $ 7692,309 100,000,000 18.6 Wenceslas Refining Company. Privately owned Wenc- eslas Refining Company is considering investing in the Czech Republic so as to have a refinery source closer to its European customers. The original investment in Czech korunas would amount to K250 million, or $7,692,309 at the current spot rate of K32.50/$, all in fixed assets, which will be depreciated over 10 years by the straight-line method. An additional K100,000,000 will be needed for working capital. For capital budgeting purposes, Wenceslas assumes sale as a going concern at the end of the third year at a price, after all taxes, equal to the net book value of fixed assets alone (not including working capital). All free cash flow will be repatriated to the United States as soon as possible. In evaluating the venture, the U.S. dollar fore- casts are shown in the previous table. Variable manufac- turing costs are expected to be 50% of sales. No additional funds need be invested in the U.S. subsidiary during the period under consideration. The Czech Republic imposes no restrictions on repatriation of any funds of any sort. The Czech corporate tax rate is 25% and the United States rate is 40%. Both countries allow a tax credit for taxes paid in other countries. Wenceslas uses 18% as its weighted average cost of capital, and its objective is to maximize present value. Is the investment attractive to Wenceslas Refining? 2 3 Problem 18.6: Wenceslas Refining Company Wenceslas Refining Company Project Viewpoint in US$) Original investment (Czeckh korunas, K) Spot exchange change (K/S) Unit demand Unit sales price Fixed cash operating expenses Depreciation Investment in working capital (K) 2,500,000,000 32.50 30.00 700,000 $ 10.00 $1,000,000 $ 7,692,309 2750 900,000 $ 10.30 $ 1,030,000 $ 7692,309 25.00 1,000,000 $10.60 $ 1,060,000 $ 7692,309 100,000,000
