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Wenceslas Refining Company Privately owned Wenceslas Refining Company is considering investing in the Czech Republic so as to have a refinery source closer to its European customers. The original investment in Czech korunas would amount to CZK260 million at the current spot rate of CZK34 00/$, all in fixed assets, which will be depreciated over 10 years by the straight-line method. An additional CZK110,000,000 will be needed for working capital For capital budgeting purposes, Wenceslas assumes sale as a going concern at the end of the third year at a price, after all taxes, equal to the net book value of fixed assets alone (not including working capital) All free cash flow will be repatriated to the United States as soon as possible In evaluating the venture, the U.S dollar forecasts are shown in the popup table, Variable manufacturing costs are expected to be 50% of sales No additional funds need be invested in the U.S. subsidiary during the period under consideration The Czech Republic imposes no restrictions on repatriation of any funds of any sort. The Czech corporate tax rate is 24% and the United States rate is 38% Both countries allow a tax credit for taxes paid in other countries, Wenceslas uses 18% as its weighted average cost of capital and its objective is to maximize present value. a. is the investment attractive to Wenceslas Refining from the project's viewpoint? b. Is the investment attractive to Wenceslas Refining from the parent's viewpoint? dib a. Calculate the free cash flow for year 0 from the project's viewpoint below (Round to the nearest dollar) Project Viewpoint ($) Year D Year 1 Year 2 Year 3 Initial investment Unit sales price. 10.00 $ 700.000 10.90 1.000.000 900.000 Unit demand Revenues Less costs of manufacturing Gross profit Loss (xed cash operating expenses 1 200 000) 1.230.000) (1/280,000) $ 10.50 $ s viewpoint? CEEEDS Gross prom Less fixed cash operating expenses (1.200,000) (1230,000) Less depreciation Earnings before taxes Less Czech corporate income taxes (24%) Net income Add back depreciation Less additional working capital investment Sale value Free cash flows for discounting Calculate the free cash flow for year 1 from the project's viewpoint below: (Round to the nearest dollar y Project Viewpoint ($) Year 0 Year 1 Year 2 Initial investment Unit sales price Unit demand Revenues Less costs of manufacturing 15 10.00 $ 700,000 10.50 S 900.000 (1280.000) Year 3 10.90 1,000,000 www.w 1.000.000 Revenues Less costs of manufacturing Gross profit Less fixed cash operating expenses (1,230,000) (1.280.000) Less depreciation Earnings before taxes $ Less Czech corporate income taxes (24%) s Net income Add back depreciation Less additional working capital investment Sale value Free cash flows for discounting Calculate the free cash flow for year 2 from the project's viewpoint below: (Round to the nearest dollar) Year 0 Year 1 Project Viewpoint (S) Year 2 Initial investment Unit sales price $ $ $ www.www. (1.200,000) 10.00 $ 10.50 $ Year 3 10.90 www.gy Initial investment Unit sales price Unit demand Revenues Less costs of manufacturing Gross profit Less fixed cash operating expenses Less depreciation Earnings before taxes Less Czech corporate income taxes (24%) Net income $ Add back depreciation Less additional working capital investment Sale value: Free cash flows for discounting Calculate the free cash flow for year 3 from the project's viewpoint below: (Round to the nearest dollar) $ 10.00 $ 700.000 (1.200.000) $ $ 10.50 S 900,000 (1.230,00 FYRE 10.90 1,000,000 (1,280.000) Calculate the free cash flow for year 3 from the project's viewpoint below (Round to the nearest dollar) Project Viewpoint ($) Year 0 Year 11 Year 2 Initial investment Unit sales price Unit demand Revenues Less costs of manufacturing Gross profit Less fixed cash operating expenses Less depreciation Earnings before taxes Less Czech corporate income taxes (24%) Net income Add back depreciation Less additional working capital investment Sale value Free cash flows for discounting $ 10.00 $ 10.50 $ 700,000 900,000 (1.200,000) (1.230,000) $ Year 3 10.90 1.000.000 (1,280,000) COOTD The net present value on this investment from the project's viewpoint is S (Round to the nearest dollar) From the project's viewpoint, Wenceslas Refining should the investment project because it NPV is b. Calculate the free cash flow for year 0 from the parent's viewpoint below: (Round to the nearest dollar) Parent Viewpoint ($) Year Year 1 Year 2 Year 3 Dividends remitted to parent Add back Czech taxes doomed paid Grossed up dividend Tentative US tax liability (38%) Less credit for Czech taxes paid Additional U.S. taxes due on foreign income Repatriated cash flow Initial investment and working capital Free cash flows less additional US taxes Free cash flows for discounting Calculate the free cash flow for years from the parents viewpoint below (Round to the newest dolla (Select from the drop-down menus.) Calculate the free cash flow for year 1 from the parent's viewpoint below: (Round to the nearest dollar) Parent Viewpoint ($) Year 0 Year 1 Year 2 Dividends remitted to parent $ Add back Czech taxes deemed paid Grossed up dividend Tentative U.S. tax liability (38%) Less credit for Czech taxes paid Additional U.S. taxes due on foreign income Repatriated cash flow Initial investment and working capital Free cash flows less additional US taxes $ Free cash flows for discounting Calculate the free cash flow for year 2 from the parent's viewpoint below (Round to the nearest dollar) Year 0 Year 1 Year 2 Parent Viewpoint (5) $ Dividends remitted to parent Year 3 Year 3 Calculate the free cash flow for year 2 from the parent's viewpoint below: (Round to the nearest dollar.) Parent Viewpoint ($) Year 0 Year 1 Year 2 Dividends remitted to parent $ Add back Czech taxes deemed paid Grossed up dividend Tentative U.S. tax liability (38%) Less credit for Czech taxes paid Additional U.S. taxes due on foreign income Repatriated cash flow Initial investment and working capital Free cash flows less additional US taxes. Free cash flows for discounting Calculate the free cash flow for year 3 from the parent's viewpoint below: (Round to the nearest dollar) Year 0 Year 1 Year 2 Parent Viewpoint ($) $ Dividends remitted to parent Add hack Czoch tavoc doomad naid Year 3 Year 3 Calculate the free cash flow for year 3 from the parent's viewpoint below. (Round to the nearest dollar) Parent Viewpoint ($) Year 0 Year 11 Year 2 Dividends remitted to parent $ Add back Czech taxes deemed paid Grossed up dividend Tentative U.S. tax liability (38%) Less credit for Czech taxes paid Additional U.S. taxes due on foreign income Repatriated cash flow Initial investment and working capital Free cash flows less additional U.S. taxes Free cash flows for discounting $ The net present value on this investment from the parent's viewpoint is $ (Round to the nearest dollar) From the parent's viewpoint, Wenceslas Refining should the investment project because its NPV is $ Year 3 (Select from the drop-down menus.) Data table Assumptions Original investment (Czech korunas, CZK) Spot exchange rate (CZK/S) Unit demand Unit sales price Fixed cash operating expenses Investment in working capital (CZK) 0 CZK260,000,000 34.00 CZK110,000,000 Print 31.00 700.000 $10.00 $1,200,000 Done 2 29.00 900,000 $10.50 $1,230,000 13 3 26.00 1,000,000 $10.90 $1,280,000 D