Privately owned Superior Oil Machine Company is considering investing in Czech Republic to have a refinery source closer to its European customers. The following assumptions are being considered. 0 1 2 3 25,000,000 32.50 Assumptions Original Investment (korunas, K) Spot exchange rate (K/$) Unit demand Sales price per unit (K) Cash operating expenses (K) Depreciation (K) Investment in working capital (K) 30.00 700,000 10.00 1,000,000 500,000, 27.50 900,000 10.30 1,030,000 500,000 25.00 1,000,000 10.60 1,060,000 500,000 10,000,000 Other Assumptions: 1. After year 3, Superior Oil expects the refinery to grow by 10% per year in perpetuity. HINT: Compute the terminal value in year 3 for both the project and Superior's investment using the perpetual model. The models are provided in your Lecture slides. 2. Since Superior Oil expects the refinery to operate in perpetuity, there is no expectation to recover the investment in working capital. 3. Variable manufacturing costs are expected to be 50% of sales. 4. The Czech corporate income tax rate is 25% and the United States corporate income tax rate is 30%. 5. The Czech refinery will pay dividends equal to 50% of net income to Superior Oil. Superior Oil will be required to pay taxes in the United States on any dividend income received. 6. Superior Oil uses a weighted average cost of capital of 18%. Required: A. Compute the Czech refinery's NPV and IRR and determine whether it is an attractive investment. (10 points) B. Compute the NPV and IRR of Superior Oil's investment and determine whether it is worthwhile (10 points) Privately owned Superior Oil Machine Company is considering investing in Czech Republic to have a refinery source closer to its European customers. The following assumptions are being considered. 0 1 2 3 25,000,000 32.50 Assumptions Original Investment (korunas, K) Spot exchange rate (K/$) Unit demand Sales price per unit (K) Cash operating expenses (K) Depreciation (K) Investment in working capital (K) 30.00 700,000 10.00 1,000,000 500,000, 27.50 900,000 10.30 1,030,000 500,000 25.00 1,000,000 10.60 1,060,000 500,000 10,000,000 Other Assumptions: 1. After year 3, Superior Oil expects the refinery to grow by 10% per year in perpetuity. HINT: Compute the terminal value in year 3 for both the project and Superior's investment using the perpetual model. The models are provided in your Lecture slides. 2. Since Superior Oil expects the refinery to operate in perpetuity, there is no expectation to recover the investment in working capital. 3. Variable manufacturing costs are expected to be 50% of sales. 4. The Czech corporate income tax rate is 25% and the United States corporate income tax rate is 30%. 5. The Czech refinery will pay dividends equal to 50% of net income to Superior Oil. Superior Oil will be required to pay taxes in the United States on any dividend income received. 6. Superior Oil uses a weighted average cost of capital of 18%. Required: A. Compute the Czech refinery's NPV and IRR and determine whether it is an attractive investment. (10 points) B. Compute the NPV and IRR of Superior Oil's investment and determine whether it is worthwhile (10 points)
