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Babcock Company, a British company, is considering establishing an operation in the United States to assemble and distribute ovens. British Pounds ( BP ) U

Babcock Company, a British company, is considering establishing an
operation in the United States to assemble and distribute ovens.
British Pounds (BP) U.S. Dollars (USD)
Initial investment estimate 2400000027500000
Investment terminal value at the end of three years 25000000
Total after-tax annual cash flow:
Year 18000000
Year 211500000
Year 313000000
The U.S. national legislature is considering a reduction in the corporate
income tax rate, resulting in Total after-tax annual cash flow:
Year 18000000
Year 214000000
Year 315500000
Probability of the tax rate reduction occurring 50%
Discount rate in evaluating potential capital investments 10%
Present value factors at 12% are:
Period PV Factor
10.909
20.826
30.751
Distribution of U.S. operation after-tax annual cash flow as dividend to Babcock at the end of each year. 100%
Forecasted exchange rates: BP USD
Year 10.761
Year 20.721
Year 30.651
Required:
1. Project Perspective
TACF USD PV Factor Present Value
Year 1
Year 2
Year 3
Less: Initial investment
NPV in USD
Calculation of NPV (in USD) with possible tax rate change:
TACF USD PV Factor Present Value
Year 1
Year 2
Year 3
Less: Initial investment
NPV in USD
Calculation of Project Expected NPV (in USD):
NPV Probability Expected NPV
without tax rate change
with tax rate change
Project expected NPV in USD
2. Parent Company Perspective
TACF BP PV Factor Present Value
Year 1
Year 2
Year 3 include terminal value
Less: Initial investment
NPV in USD
Calculation of NPV (in USD) with possible tax rate change:
TACF USD PV Factor Present Value
Year 100.8930
Year 2
Year 3 include terminal value
Less: Initial investment
NPV in USD
Calculation of Project Expected NPV (in USD):
NPV Probability Expected NPV
without tax rate change
with tax rate change
Project expected NPV in USD

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