Question
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
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 |
| $ |
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| |
Add back Czech taxes deemed paid |
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Grossed up dividend | $ |
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Tentative U.S. tax liability (42%) | $ |
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Less credit for Czech taxes paid |
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Additional U.S. taxes due on foreign income | $ |
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Repatriated cash flow |
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Initial investment and working capital |
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Free cash flows less additional U.S. taxes |
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Free cash flows for discounting |
|
| $ |
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Enter any number in the edit fields and then click Check Answer.
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