FINC 5510: MULTINATIONAL FINANCIAL MANAGEMENT FALL 2020 Homework 11 - Multinational Capital Budgeting Name: Due Date: Tuesday, November 17, 2020 SHOW ALL WORKINGS!!!!!! Privately owned Superior Oil Machine Company is considering investing in Czech Republic to have a refinery source closer to its European customers. The following assumptions are being considered. Assumptions 0 1 2 3 Original Investment (korunas, K) 250,000,000 Spot exchange rate (K/$) 32.50 30.00 27.50 25.00 Unit demand 700,000 900,000 1,000,000 Sales price per unit (K) 10.00 10.30 10.60 Cash operating expenses (K) 1,000,000 1,030,000 1,060,000 Depreciation (K) 500,000, 500,000 500,000 Investment in working capital (K) 100,000,000 Other Assumptions: 1. After year 3, Superior Oil expects the refinery to grow by 10% per year in perpetuity. HINT: Compute the terminal value in year 3 for both the project and Superior's investment using the perpetual model. The models are provided in your Lecture slides. 2. Since Superior Oil expects the refinery to operate in perpetuity, there is no expectation to recover the investment in working capital. 3. Variable manufacturing costs are expected to be 50% of sales. 4. The Czech corporate income tax rate is 25% and the United States corporate income tax rate is 30%. 5. The Czech refinery will pay dividends equal to 50% of net income to Superior Oil. Superior Oil will be required to pay taxes in the United States on any dividend income received 6. Superior Oil uses a weighted average cost of capital of 18% for itself and the proposed Czech oil refinery. Required: A. Compute the Czech refinery's NPV and IRR and determine whether it is an attractive investment. (10 points) B. Compute the NPV and IRR of Superior Oil's investment and determine whether it is worthwhile (10 points) Requirements: 1. Answer the homework questions and upload your responses by the due date. 2. Show your workings. 3. If you complete the questions in Microsoft Excel, then your cells must show the formulas that you used and the workbook (with each question answered on a separate spreadsheet) must be uploaded. 4. If you complete the questions in Microsoft Word, then you must show your workings on the document and upload it. 5. If you complete the questions on written paper, then you must show your workings on the paper and scan or take pictures of your submission and upload them. Ensure the pictures can be opened if you elect to upload pictures. FINC 5510: MULTINATIONAL FINANCIAL MANAGEMENT FALL 2020 Homework 11 - Multinational Capital Budgeting Name: Due Date: Tuesday, November 17, 2020 SHOW ALL WORKINGS!!!!!! Privately owned Superior Oil Machine Company is considering investing in Czech Republic to have a refinery source closer to its European customers. The following assumptions are being considered. Assumptions 0 1 2 3 Original Investment (korunas, K) 250,000,000 Spot exchange rate (K/$) 32.50 30.00 27.50 25.00 Unit demand 700,000 900,000 1,000,000 Sales price per unit (K) 10.00 10.30 10.60 Cash operating expenses (K) 1,000,000 1,030,000 1,060,000 Depreciation (K) 500,000, 500,000 500,000 Investment in working capital (K) 100,000,000 Other Assumptions: 1. After year 3, Superior Oil expects the refinery to grow by 10% per year in perpetuity. HINT: Compute the terminal value in year 3 for both the project and Superior's investment using the perpetual model. The models are provided in your Lecture slides. 2. Since Superior Oil expects the refinery to operate in perpetuity, there is no expectation to recover the investment in working capital. 3. Variable manufacturing costs are expected to be 50% of sales. 4. The Czech corporate income tax rate is 25% and the United States corporate income tax rate is 30%. 5. The Czech refinery will pay dividends equal to 50% of net income to Superior Oil. Superior Oil will be required to pay taxes in the United States on any dividend income received 6. Superior Oil uses a weighted average cost of capital of 18% for itself and the proposed Czech oil refinery. Required: A. Compute the Czech refinery's NPV and IRR and determine whether it is an attractive investment. (10 points) B. Compute the NPV and IRR of Superior Oil's investment and determine whether it is worthwhile (10 points) Requirements: 1. Answer the homework questions and upload your responses by the due date. 2. Show your workings. 3. If you complete the questions in Microsoft Excel, then your cells must show the formulas that you used and the workbook (with each question answered on a separate spreadsheet) must be uploaded. 4. If you complete the questions in Microsoft Word, then you must show your workings on the document and upload it. 5. If you complete the questions on written paper, then you must show your workings on the paper and scan or take pictures of your submission and upload them. Ensure the pictures can be opened if you elect to upload pictures