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

CZK250250

million, at the current spot rate of

CZK33.0033.00/$,

all in fixed assets, which will be depreciated over 10 years by the straight-line method. An additional

CZK80 comma 000 comma 00080,000,000

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,

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.Variable manufacturing costs are expected to be

5555%

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

2525%

and the United States rate is

4242%.

Both countries allow a tax credit for taxes paid in other countries. Wenceslas uses

1919%

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?

Calculate the free cash flow for year 1 from the parent's viewpoint below:(Round to the nearestdollar.)

Parent Viewpoint ($)		Year 0		Year 1		Year 2		Year 3
Dividends remitted to parent			$
Add back Czech taxes deemed paid
Grossed up dividend			$
Tentative U.S. tax liability (42%)			$
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			$

Enter any number in the edit fields and then click Check Answer.