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 $15,750,00020,500,000$

Investment terminal value at the end of three years $17,000,000$

Total after$-$tax annual cash flow:

Year $18,500,000$

Year $210,250,000$

Year $312,475,000$

The U$.$S$.$ national legislature is considering a reduction in the corporate

income tax rate, resulting in Total after$-$tax annual cash flow:

Year $19,300,000$

Year $214,000,000$

Year $315,500,000$

Probability of the tax rate reduction occurring $50\%$

Discount rate in evaluating potential capital investments $12\%$

Present value factors at $12\%$ are:

Period PV Factor

$10\mathrm{.}909$

$20\mathrm{.}826$

$30\mathrm{.}751$

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 $10\mathrm{.}801\mathrm{.}00$

Year $20\mathrm{.}781\mathrm{.}00$

Year $30\mathrm{.}721\mathrm{.}00$

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 $3$

Less: Initial investment

NPV in USD

Calculation of NPV $($in USD$)$ with possible tax rate change:

TACF BP 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