Coffee Mugs, Inc. is a U.S. firm that is planning to build a new production facility in either the USA or China. The initial cost to build the facility will be $9 million if built in the USA or 48.5 million if built in China. In either location, the project will require an initial investment of $225,000 in net working capital. Net working capital at the end of each of years 1 through 4 will be $45,000. Net working capital will be $0 at the end of the fifth (final) year of the project. The current exchange rate between the two currencies is 6.88 /$. The risk-free rate in the U.S. is 0.82% and the risk-free rate in China is 4.1%. Coffee Mugs, Inc. pays a 35% tax rate on its taxable income. The firms current and target debt-equity ratio is 0.62. Its cost of debt is 4.5% and its cost of equity is 11.5%. The facility will be fully depreciated over five years (straight line) with no salvage value. The facility is expected to impact the firms operating revenues and expenses as shown below.

	USA Location		China Location
Year	Additional Revenue ($)	Additional Expense ($)	Additional Revenue ()	Additional Expense ()
1	$4,500,000	$1,500,000	20,000,000	7,000,000
2	$4,500,000	$1,500,000	25,000,000	8,000,000
3	$5,500,000	$1,750,000	30,000,000	9,000,000
4	$6,000,000	$2,000,000	35,000,000	9,000,000
5	$6,000,000	$2,000,000	40,000,000	8,000,000

Which location, if either, should TechMedia, Inc. choose?

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