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Petro Refining Company, a US corporation, is considering investing in Poland so as to have a refinery source close to its European customers. The original investment in Polish Zloty would amount to PLN240 million, which will be depreciated with the straight-line method. For capital budgeting purposes, Petro assumes sale as a going concern at the end of the three years at a price of PLN180 million, which is equal to the book value at that point. An additional PLN100,000,000 will be needed for inventory and half of the amount will be financed with a 3-year loan in Poland for which Petro will have to pay 7% interest annually and pay back the principal of the loan at the end of the third year. The inventory will be liquidated at the end of the project. When negotiating the deal with the Polish government, Petro agreed not to repatriate its profits until the end of the three years. Instead, Petro plans on investing its yearly cash flows at the prevailing interest rate in Poland. In evaluating the venture, the forecasts are as follows:

Units sold: 7,000,000 in one year, 9,000,000 in two years and 10,000,000 in three years Price per unit: PLN10 in one year, PLN10.3 in two years and PLN10.6 in three years

Fixed Costs: PLN 1,000,000 in one year, PLN1,030,000 in two years and PLN1,060,000 in three years Variable manufacturing costs are expected to be 50% of the value of sales.

The current spot rate is PLN/USD 4.

The corporate tax rate on ordinary income is 30% both in the Poland and the United States. Both countries allow a tax credit for taxes paid in other countries (no additional taxes need to be paid). The interest rate is 1% in the Poland and 3% in the US, and IRP holds. The forward rate is considered a good estimate for the future spot rate. The cost of capital for Petro is 12%. Due to added country risk in Poland, Petro will add a premium of 2% to its cost of capital when discounting the cash flows of this project. Is the investment attractive to Petro Rening? Please calculate the NPV and IRR and discuss.

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