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Details TechMedia, Inc. is a U.S. firm that is planning to build a new production facility in either the USA or China. The initial cost to build the facility will be $10 million if built in the USA or ¥55 million if built in China. In either location, the project will require an initial investment of $200,000 in net working capital. Net working capital at the end of each of years 1 through 4 will be $50,000. Net working capital will be $0 at the end of the fifth (final) year of the project. The current exchange rate between the two currencies is 6.3 ¥/$. The risk-free rate in the U.S. is 0.5% and the risk-free rate in China is 6.5%. TechMedia, Inc. pays a 35% tax rate on its taxable income. The firm’s current and target debt-equity ratio is 0.6. Its cost of debt is 6.15% and its cost of equity is 11%. The facility will be fully depreciated over five years (straight line) with no salvage value. The facility is expected to impact the firm’s operating revenues and expenses as shown below. Which location should TechMedia, Inc. choose? Your analysis should incorporate the following financial management concepts: incremental cash flows, NPV, IRR, and WACC.
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