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 $2).$