Brush Mountain Enterprises, Inc. (BME) is a Virginia corporation. BME is considering three alternative locations for a new manufacturing facilityVirginia, Ireland, and Belize. If an international location is selected, the facility will be owned and operated by a foreign subsidiary organized under the laws of that country.

The new facility requires an initial investment of $100 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 the reinvested earnings and profits. All liquidation proceeds will be repatriated to the parent corporation, BME.

The pretax returns and local tax rates are:

...................Tax Rate Pretax Return

Virginia ....... 35% 20%

Ireland ........ 20% 18%

Belize ..........10% 16%

Required:

1. Suppose the investment horizon is 5 years (n = 5). After paying any U.S. taxes due on repatriation, how much after-tax accumulation will BME have under each of the three location scenarios?

2. Suppose the investment horizon is 20 years (n = 20). After paying any U.S. taxes due on repatriation, how much after-tax accumulation will BME have under each of the three location scenarios?

3. Explain why future after-tax accumulations are higher from investment in Ireland rather than Belize, despite the fact that both countries offer the same after-local-tax rate of return (rf = 14.4%).

4. Explain why the location producing the highest after-tax accumulation changes as the investment horizon increases from 5 to 20 years (i.e. comparing your results from parts 1 and 2).