A US multinational is contemplating a production facility in the UK. The production will be sold locally in the UK. The cost of the facility is estimated at $150,000,000 USD. Here is other pertinent information on the project:
Year
1 2 3 4
Price per unit GBP 1,500 1550 1,600 1,800
Unit sales 50,000 180,000 360,000 500,000
Variable costs/Unit GBP 1,000 1,200 1,300 1,500
Fixed expenses GBP 150,000,000 75,000,000 87,000,000 95,000,000
Noncash expenses GBP 50,000,000 50,000,000 50,000,000 50,000,000
British tax rate 35% 35% 40% 40%
Withholding tax rate 10% 10% 10% 10%
Profit remittance % 10% 50% 75% 100%
Exchange rate $/GBP 1.35 1.45 1.75 1.35
The required rate of return in 12%. Examine this project form the parent’s perspective. Should the project be undertaken?