Havel Robotics Company $($a U$.$S$.-$based firm$)$ exports $25,000$ industrial robots per year to its Chinese sales subsidiary under an agreement that covers a five$-$year period. In China, the robots are sold for the RMB $($Chinese currency$)$ equivalent of $$50$ per unit. The total costs in the United States are direct manufacturing costs and shipping costs, which amount to $$35$ per unit. Thus, Havel generates a pre$-$tax profit of $$15$ on each robot it exports to China. The market for industrial robots in China is stable, and Havel holds the major portion of the market.$$

In $2020,$ the Chinese government, adopting a policy of replacing imported robots with local products, invited Havel to open an assembly plant in China. If Havel makes the investment, it will operate the plant for five years and then sell the building and equipment to Chinese investors at net book value $($cost less accumulated depreciation$)$ at the time of sale plus the current amount of any working capital. Havel will be allowed to repatriate $100$ percent of cash flow from operations $($net income plus depreciation$)$ to the United States each year.

Havel$$s anticipated outlay in $2020$ would be $$1,500,000($buildings and equipment, $$750,000,$ and working capital, $$750,000).$ Buildings and equipment will be depreciated over five years on a straight$-$line basis $($no salvage value$).$ At the end of the fifth year, buildings and equipment will have a net book value of $$0.$ However, the $$750,000$ of initial working capital will be allowed to be repatriated to the United States, and will not be subject to any taxation.

Locally assembled robots will be sold for the RMB equivalent of $$50$ each. Operating expenses per robot are as follows:

Materials purchased in China $($dollar equivalent of RMB cost$)$ $$15$

Components imported from U$.$S$.$ parent $8$

Variable costs per unit $$23$

The $$8$ transfer price per unit for components sold by Havel to its Chinese subsidiary consists of $$4$ of direct costs incurred in the United States and $$4$ of pre$-$tax profit to Havel. There are no other operating costs in either China or the United States.

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The corporate income tax rates in China and the United States are $25$ and $21$ percent, respectively.

Havel uses a $15$ percent discount rate to evaluate all its investment projects. The present value factor for a single payment in five periods at $15$ percent is $0\mathrm{.}497.$ The present value factor for an annuity of payments for five periods at $15$ percent is $3\mathrm{.}352.$

Assume the investment is made at the end of $2020,$ and all operating cash flows occur at the end of $2021$ through $2025.$ The RMB$/$U$.$S$.$ dollar exchange rate is expected to remain constant over the five$-$year period.$$ If Havel decides not to make the investment in China, it will still be able to export fully assembled robots to its Chinese sales subsidiary for the foreseeable future.

Required:

Assuming that Havel uses a parent company perspective in making foreign capital investment decisions, do you recommend that the company make the investment?

Havel learns that if it decides not to invest in China, a German company will probably make an investment similar to that being considered by Havel. The German investment would be protected by the Chinese government against imports by other foreign robot manufacturers. Thus, Havel would no longer be able to export robots to its Chinese sales subsidiary. How does this information affect your analysis and recommendation?