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)?