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TechMedia, Inc. is a U. firm that is planning to build a new production facility in either theUSA or China.
TechMedia, Inc. is a U.S. firm that is planning to build a new production facility in either theUSA or China. The initial cost to build the facility will be $10 million if built in the USA or ¥55 millionif built in China. In either location, the project will require an initial investment of $200,000 in networking capital. Net working capital at the end of each of years 1 through 4 will be $50,000. Networking capital will be $0 at the end of the fifth (final) year of the project. The current exchange ratebetween the two currencies is 6.3 ¥/$. The risk-free rate in the U.S. is 0.5% and the risk-free rate inChina is 6.5%. TechMedia, Inc. pays a 35% tax rate on its taxable income. The firm’s current andtarget debt-equity ratio is 0.6. Its cost of debt is 6.15% and its cost of equity is 11%. The facility will befully depreciated over five years (straight line) with no salvage value. The facility is expected to impactthe firm’s operating revenues and expenses as shown below.USA Location China LocationYearAdditionalRevenue ($)AdditionalExpense ($)AdditionalRevenue (¥)AdditionalExpense (¥)1 $4,000,000 $1,500,000 ¥20,000,000 ¥7,000,0002 $4,000,000 $1,500,000 ¥25,000,000 ¥8,000,0003 $5,000,000 $1,750,000 ¥30,000,000 ¥9,000,0004 $6,000,000 $2,000,000 ¥35,000,000 ¥9,000,0005 $6,000,000 $2,000,000 ¥40,000,000 ¥8,000,000Which location should TechMedia, Inc. choose?
