Multinational Location Decision

Brush Mountain Enterprises, Inc. $($BME$)$ is a Virginia corporation. BME is considering three alternative locations for a new manufacturing facility$$Virginia$,$ Ireland, and Belize. If an international location is selected, the facility will be owned and operated by a foreign subsidiary organized under the laws of that country.

The new facility requires an initial investment of $$100$ million, and any profits during the n$-$year investment horizon will be reinvested in the facility and will earn the same pretax return as the original investment. After n years the facility will be sold for an amount equal to the cumulative investment in the facility, that is$,$ the original investment and all the reinvested earnings and profits. All liquidation proceeds will be repatriated to the parent corporation, BME.

The pretax returns and local tax rates are:

Required:

Tax Rate Pretax Return

Virginia $30\%19\%$

Ireland $20\%18\%$

Belize $10\%16\%$

$1.$ Suppose the investment horizon is $5$ years $($n $=5).$ After paying any U$.$S$.$ taxes due on repatriation, how much after$-$tax accumulation will BME have under each of the three location scenarios?

$2.$ Suppose the investment horizon is $20$ years $($n $=20).$ After paying any U$.$S$.$ taxes due on repatriation, how much after$-$tax accumulation will BME have under each of the three location scenarios?

$3.$ Explain why future after$-$tax accumulations are higher from investment in Ireland rather than Belize, despite the fact that both countries offer the same after$-$local$-$tax rate of return $($rf $=14\mathrm{.}4\%).$

$4.$ Explain why the location producing the highest after$-$tax accumulation changes as the investment horizon increases from $5$ to $20$ years $($i$.$e$.$ comparing your results from parts $1$ and $2).$

$*$please confim the answer below

$1.$ After$-$Tax Accumulation for a $5-$Year Horizon:

Virginia: $$180\mathrm{.}17$ million

Ireland: $$172\mathrm{.}43$ million

Belize: $$151\mathrm{.}86$ million

$2.$ After$-$Tax Accumulation for a $20-$Year Horizon:

Virginia: $$1,172\mathrm{.}53$ million

Ireland: $$1,297\mathrm{.}19$ million

Belize: $$1,142\mathrm{.}41$ million

$3.$ Why are Ireland's after$-$tax accumulations higher than Belize's?

Despite both having the same after$-$local$-$tax return $(14\mathrm{.}4\%),$ Ireland's higher foreign tax rate $(20\%)$ reduces the U$.$S$.$ residual tax, resulting in higher after$-$tax accumulations compared to Belize, where the lower tax rate $(10\%)$ leads to more U$.$S$.$ taxes owed.

$4.$ Why does the best location change with a longer investment horizon?

In the short term $(5$ years$),$ Virginia's higher pretax return leads to the highest accumulation. However, over the long term $(20$ years$),$ Ireland's higher after$-$local$-$tax return benefits from compounding, making it the best location for after$-$tax accumulation.

Step$-$by$-$step explanation

$1.$ Part $1$: $5-$Year Horizon $($n $=5)$

Virginia:

After$-$local$-$tax rate of return: rf$=(10\mathrm{.}30)\backslash$times $19\%=13\mathrm{.}3\%$

Formula: A$5=100\backslash$times $(1+0\mathrm{.}133)^5$

U$.$S$.$ residual tax: Residual Tax$=(186\mathrm{.}16\backslash$times $(10\mathrm{.}30))\backslash$times $(0\mathrm{.}350\mathrm{.}30)=(130\mathrm{.}31)\backslash$times $0\mathrm{.}05=6\mathrm{.}52$ million

After$-$tax accumulation: $186\mathrm{.}166\mathrm{.}52=180\mathrm{.}17$ million

Ireland:

After$-$local$-$tax rate of return: rf$=(10\mathrm{.}20)\backslash$times $18\%=14\mathrm{.}4\%$

Formula: A$5=100\backslash$times $(1+0\mathrm{.}144)^5$

U$.$S$.$ residual tax: Residual Tax$=(195\mathrm{.}67\backslash$times $(10\mathrm{.}20))\backslash$times $(0\mathrm{.}350\mathrm{.}20)=(156\mathrm{.}54)\backslash$times $0\mathrm{.}15=23\mathrm{.}48$ million

After$-$tax accumulation: $195\mathrm{.}6723\mathrm{.}48=172\mathrm{.}43$ million

Belize:

After$-$local$-$tax rate of return: rf$=(10\mathrm{.}10)\backslash$times $16\%=14\mathrm{.}4\%$

Formula: A$5=100\backslash$times $(1+0\mathrm{.}144)^5$

U$.$S$.$ residual tax: Residual Tax$=(195\mathrm{.}67\backslash$times $(10\mathrm{.}10))\backslash$times $(0\mathrm{.}350\mathrm{.}10)=(176\mathrm{.}11)\backslash$times $0\mathrm{.}25=44\mathrm{.}28$ million

After$-$tax accumulation: $195\mathrm{.}6744\mathrm{.}28=151\mathrm{.}86$ million

$2.$ Virginia:

After$-$local$-$tax rate of return: rf$=13\mathrm{.}3\%$

Formula: A$20=100\backslash$times $(1+0\mathrm{.}133)^20$

U$.$S$.$ residual tax: Residual Tax$=(1235\mathrm{.}46\backslash$times $(10\mathrm{.}30))\backslash$times $(0\mathrm{.}350\mathrm{.}30)=(864\mathrm{.}82)\backslash$times $0\mathrm{.}05=43\mathrm{.}24$ million$\backslash$

After$-$tax accumulation: $1235\mathrm{.}4643\mathrm{.}24=1,172\mathrm{.}53$ million

Ireland:

After$-$local$-$tax rate of return: rf$=14\mathrm{.}4\%$

Formula: A$20=100\backslash$times $(1+0\mathrm{.}144)^20$

U$.$S$.$ residual tax: Residual Tax$=(1518\mathrm{.}40\backslash$times $(10\mathrm{.}20))\backslash$times $(0\mathrm{.}350\mathrm{.}20)=(1214\mathrm{.}72)\backslash$times $0\mathrm{.}15=182\mathrm{.}21$ million

After$-$tax accumulation: $1518\mathrm{.}40182\mathrm{.}21=1,297\mathrm{.}19$ million$1518\mathrm{.}40-182\mathrm{.}21=1,297\mathrm{.}19$

Belize:

After$-$local$-$tax rate of return: rf$=14\mathrm{.}4\%$

Formula: A$20=100\backslash$times $(1+0\mathrm{.}144)20$

U$.$S$.$ residual tax: Residual Tax$=(1518\mathrm{.}40\backslash$times $(10\mathrm{.}10))\backslash$times $(0\mathrm{.}350\mathrm{.}10)=(1366\mathrm{.}56)\backslash$times $0\mathrm{.}25=341\mathrm{.}64$ million

After$-$tax accumulation: $1518\mathrm{.}40341\mathrm{.}64=1,142\mathrm{.}41$ million