Question

SHOW CALCULATIONS PLEASE: Your company wants to build a new manufacturing facility which will cost $2 million for plant building and $800,000 for machinery. It will have a net annual cash flow of $750,000 for the next 10 years.

You could build it in your US location where your total incremental tax rate would be 45%. However you are also considering building it in Ireland.Calculate the after tax present worth of adding a new manufacturing facility in each of the two countries and determine where it would be better to place the investment. Assume that the interest rate is 8% per year. You will need to research tax methods and depreciation rules in Ireland, and compare with those of the US. Use these results to recommend where to make the investment. Make sure to discuss the effects of the financial issues in the decision process. Present your analysis as an appendix to your report.

PLEASE BE MINDFUL OF THE 8% INTEREST RATE PR/YEAR

Answer 1

Net present value of the project is the difference between the cash inflows and cash outflows.

In NPV the present value of the future inflows are calculated to make a better analysis.

This is required as in the future the inflation rate will go up and the purchasing power of $ will go down.

So to get the value of future profits the cash inflows are discounted by the factor.

The NPV can be calculated as below

Cash inflows

Less Tax

= Net cash inflows

Net cash inflows* Discounted rate= Net present value of cash inflows.

Now this discounted rate is calculated as below.

1/(1+R/100)^T

Where R is rate of interest and T= year in which cash inflow will be .

First we will calculate the NPV in USA and than in Ireland.

Now we will calculate the ireland NPV

hence the NPV is postive is Ireland hence the Investment should be made in ireland