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Breckenridge Brewery, a privately owned brewery located in Colorado is considering purchasing Tuzla Brewing in Bosnia as a means of establishing a footprint in Europe. The original investment in Konvertible Marks (BAM) would amount to BAM150 million, all in fixed assets, which will be depreciated by the straight-line method ( $5,000,000 per year). An additional $8,000,000 will be needed for working capital. For capital budgeting purposes, Breckenridge assumes the sale of the business at the end of the third year for $115M. Assume this venture qualifies for a 0% capital gains tax in both Bosnia and the United States. All net income will be repatriated to the United States in the form of dividends at the end of each year. In evaluating the venture, the exchange rate is expected to remain constant at USDBAM 1.25. Revenues are projected at $75,000,000 a year for the next three years. Variable manufacturing costs are expected to be 45% of sales and fixed cash operating expenses are estimated at $1,000,000 per year. No additional funds need be invested in the U.S. subsidiary during the period under consideration. The Bosnia imposes no restrictions on repatriation of any funds of any sort. For the next three years the BiH corporate tax rate is 0% and the United States rate is 35%. Breckenridge uses 18% as its weighted average cost of capital and uses the USD in all capital budgeting analysis. Is the investment attractive to Breckenridge

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