1-Determine the expected net present value of the potential U.S. investment from a project perspective.2-Determine the expected net present value of the potential U.S. investment from a parent company perspective
Saint Leo University (SLU), a British company, is considering establishing an operation in the United
States to assemble and distribute smart speakers. The initial investment is estimated to be 25,000,000
British pounds (GBP), which is equivalent to 30,000,000 U.S. dollars (USD) at the current exchange rate.
Given the current corporate income tax rate in the United States, SLU estimates that total after-tax annual
cash flow in each of the three years of the investment’s life would be US$10,000,000, US$12,000,000,
and US$15,000,000, respectively. However, the U.S. national legislature is considering a reduction in the
corporate income tax rate that would go into effect in the second year of the investment’s life and would
result in the following total annual cash flows: US$10,000,000 in year 1, US$14,000,000 in year 2, and
US$18,000,000 in year 3. SLU estimates the probability of the tax rate reduction occurring at 50 percent.
SLU uses a discount rate of 12 percent in evaluating potential capital investments. Present value factors at
12 percent are as follows:
The U.S. operation will distribute 100 percent of its after-tax annual cash flow to SLU as a dividend at the end of
each year. The terminal value of the investment at the end of three years is estimated to be US$25,000,000. The
U.S. withholding tax on dividends is 5 percent; repatriation of the investment’s terminal value will not be subject
to U.S. withholding tax. Neither the dividends nor the terminal value received from the U.S. investment will be
subject to British income tax.
Required:
1-Determine the expected net present value of the potential U.S. investment from a project perspective.
2-Determine the expected net present value of the potential U.S. investment from a parent company perspective.
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