You have a choice of starting a business in either the US or a foreign country (Fredonia). In Fredonia, income tax is a flat 25%. Depreciation in Fredonia is straight line annually. (There is no offset of 6 months in the first or last year). The investment to start the business is $100,000 in machinery with a five year depreciation schedule. The purchase is made on January 1 of the first year of operation. Buildings and land are rented and there is no depreciation on them. In each year, the revenue is $60,000 and the total manufacturing expenses are $20,000. Your analysis horizon is 6 years. Find the after tax internal rate of return for investment in each place and determine the best location. (US or Fredonia) Assume US tax rate is 30% (20 points)

ANSWER IS

US 9.1% Fredonia 9.5%

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