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 CZK240 million, at the current spot rate of CZK33.00/$, all in fixed assets, which will be depreciated over 10 years by the straight-line method. An additional CZK90,000,000 will be needed for working capital. For capital budgeting purposes, Wenceslas assumes sale as a going concern at the end of the third year at a price, after all taxes, equal to the net book value of fixed assets alone (not including working capital). All free cash flow will be repatriated to the United States as soon as possible. In evaluating the venture, the U.S. dollar forecasts are shown in the popup table, B. Variable manufacturing costs are expected to be 45% of sales. No additional funds need be invested in the U.S. subsidiary during the period under consideration. The Czech Republic imposes no restrictions on repatriation of any funds of any sort. The Czech corporate tax rate is 25% and the United States rate is 40%. Both countries allow a tax credit for taxes paid in other countries. Wenceslas uses 17% as its weighted average cost of capital, and its objective is to maximize present value. a. Is the investment attractive to Wenceslas Refining from the project's viewpoint? bls the investment attractive to Wenceslas Refining from the narent's viewnoint? Data Table 0 3 0 CZK240,000,000 33.00 Assumptions Original investment (Czech korunas, CZK) Spot exchange rate (CZK/$) Unit demand Unit sales price Fixed cash operating expenses Investment in working capital (CZK) 30.00 800,000 $11.50 $1,000,000 28.00 800,000 $11.80 $1,040,000 25.50 1,100,000 $12.30 $1,070,000 CZK90,000,000 a. Calculate the free cash flow for year 0 from the project's viewpoint below: (Round to the nearest dollar.) Project Viewpoint ($) Year 0 Year 1 Year 2 Year 3 Initial investment Unit sales price Unit demand 11.50 $ 800,000 11.80 $ 800,000 12.30 1,100,000 Revenues (1,000,000) (1,040,000) (1,070,000) Less costs of manufacturing Gross profit Less fixed cash operating expenses Less depreciation Earnings before taxes Less Czech corporate income taxes (25%) Net income Add back depreciation (1,000,000) (1,040,000) (1,070,000) Less fixed cash operating expenses Less depreciation Earnings before taxes Less Czech corporate income taxes (25%) Net income Add back depreciation Less additional working capital investment Sale value Free cash flows for discounting
