U.S. Oil & Refining (USOR) 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 CZK 250 million, all in fixed assets, which will be depreciated over 10 years by the straight-line method. For capital budgeting purposes, USOR considera three year investment horizon. After the third year, the free cashflow is expected to grow indefinitely at 2% per year. Total sale revenues for the first year are expected to be CZK 210,000,000. The next two years, sales are expected to grow at a rate of 10% per year. Variable manufacturing costs are expected to be 50% of sales. Fixed operating expenses are estimated to be CZK 30,000,000 in the first year, increasing at a rate of 5% per year. The Czech subsidiary will pay a license fee of 5% of total sales to the parent company. Because USOR plans to finance the project internally, the net profit will be fully repatriated to the United States under the form of dividends. The Czech Republic imposes no withholding taxes on the distribution of dividends, interest rates or license fees to foreign institutions. The Czech corporate tax rate is 25% and the United States rate is 40%.The current spot rate is equal to CZK/USD 20.00. Inflation rates are equal to 5% per year in the Czech Republic and 3% per year in the United States. USOR uses 15% as its domestic cost of capital, but adds a risk premium of 3% for the Czech investment because of perceived greater risk.

Q1: Calculate the Net Present Value for the project and evaluate the result.

Q2: Calculate the (adjusted) NPV from the parents point of view and motivate whether the project should be undertaken or not. Discuss in detail

Q3: The investment is financed with 100% equity, no debt is taken on. Which benefit (if any) could be realized is debt was issued? What could be the reason for U.S. Oil & Refining to finance the project with 100% equity?