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Intro Tennessee Whiskey is a U.S. producer of alcoholic drinks. The company is evaluating opening a new distillery in Scotland for serving the British market.

Intro

Tennessee Whiskey is a U.S. producer of alcoholic drinks. The company is evaluating opening a new distillery in Scotland for serving the British market. The project will last four years, after which the distillery will be sold.

The company has estimated the following data:

  • Initial investment required: 80 million
  • After-tax salvage value in year 4: 48 million
  • Annual depreciation: 8 million
  • British income tax rate: 35%
  • Fraction of after-tax income remitted to parent: 100%
  • Withholding tax rate imposed by Britain: 0%
  • Stock beta: 1.4
  • Bond interest rate: 8%
  • Target capital structure: 90% equity and 10% debt
  • U.S. tax rate: 35%
  • Treasury bond yield: 2%
  • Expected return on the S&P 500: 5%

The company expects the following revenue, costs, depreciation and exchange rates:

Year 0 Year 1 Year 2 Year 3
Revenue ( million) 80 80 80
Costs ( million) 64 64 64
Depreciation ( million) 8 8 8
Exchange rate (per ) $1.39 $1.35 $1.31 $1.27

Part 1

What is the cash flow to the subsidiary in year 3, including the after-tax salvage value of the distillery (in million)?

Part 2

What is the cash flow to the parent in year 3 (in $ million)?

Part 3

What is the NPV of the project (in $ million)?

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