An oil and gas company acquired the mineral rights to a project 2 years ago for a cost of $2 million dollars. Last year the company spent $0.4 millionon geological and geophysical (G&G) expenditures. Today (time zero), the company wants you to analyze whether it is better economically to sell the rights to the property for $4.0 million cash now (at time zero), or whether it would be better to keep the property and develop using one of two drilling development scenarios for which projected before-tax cash flows are given on the following time diagrams. All dollar values are in millions of dollars.-2.0 -0.4 -12.5 8.0 5.0 4.0 3.0 3.0A)-2 -1 0 1 2 3 4 5 -2 -0.4 -9 7 4 2.5 2.5 0 B)-2 -1 0 1 2 3 4 5 -2 -0.4 -9 7 4 2.5 2.5 0Use ROR analysis to determine whether it is better to sell the rights to the property today (time zero), or begin development using either the A or B scenarios. Assume the investor is seeking a nominal before-tax minimum ROR of 10%. Verify your ROR findings with NPV and PVR analyses. Then, compare the three options if the minimum ROR is raised to 20% reflecting the hurdle rate the company is currently imposing on projects.

OneClass: An oil and gas company acquired the mineral rights to a project 2 years ago for a cost of $...

The Gibson Company is a United States (US) firm that is considering a joint venture with Brasilia, DF, a Brazilian firm that grows and processes coffee beans. Gibson has a patent for a new coffee processing method. This intellectual property is motivating Gibson to expand beyond importing coffee to engaging in a joint venture to process the coffee. Gibson will invest $8 million in the proposed joint venture project, which will help to finance Brasilia 's production using the newly patented process.

The Brazilian government has guaranteed that the after-tax profits (denominated in Reals, the Brazilian currency) can be converted to US dollars at the current exchange rate and sent to the Gibson Company each year. Current exchange rates can be found at http://www.oanda.com.

For each of the first five years, 60 percent of the total profits will be distributed to Brasilia, while the remaining 40 percent will be converted to dollars to be sent to Gibson. The income tax rate for the joint venture will be 10%. However, the Brazilian government is considering raising the income tax rate to 30%. At the present time, the Brazilian government doe not impose a separate income tax on profits sent out of the country. However, the Brazilian government is considering imposing an additional 10 percent income tax on profits distributed to a foreign company. Assume that there are no other forms of tax. After considering the taxes paid in Brazil, assume an additional seven percent tax imposed by the US government on profits received by Gibson Company.

The expected total profits resulting from the joint venture per year are as follows:

Year	Total Profits from Joint Venture (in BRL)
1	40 million
2	60 million
3	70 million
4	90 million
5	120 million

Gibson's average cost of debt is 6 percent before taxes. Its average cost of equity is 9 percent. Assume that Gibsonï¿½s US income tax rate is 10 percent. Gibsonï¿½s capital structure is 70 percent debt and 30 percent equity. Gibson adds between 2 and 5 percentage points to its cost of capital when deriving its required rate of return on international joint ventures. Gibson plans to account for country and other risks within its cash flow estimates.

Gibson is concerned about country risk in the following two forms:

(1) Will the Brazilian government increase the corporate income tax rate from 10 percent to 30 percent (20 percent probability)? If this occurs, Gibson will receive additional tax credits on its US taxes, resulting in no US taxes on the profits from this joint venture.

(2) Will the Brazilian government impose a separate income tax of 10 percent on the profits distributed to foreign companies such as Gibson (20 percent probability)? If this occurs, Gibson will not receive additional tax credits, and the company will still be subject to US tax on the profits from this joint venture.

Assume that the two types of country risk are mutually exclusive. If it does anything, the Brazilian government will only implement one of these changes in its tax policies (i.e., the increase in the basic income tax on the profits of the joint venture or the additional income tax on profits distributed to foreign companies). The Brazilian government may also choose to leave things as they are.

Assignment

5. Under what circumstances might Gibson shift to more equity financing when considering joint ventures like this? What is the minimum required return that would still make this investment worthwhile?

The Gibson Company is a United States (US) firm that is considering a joint venture with Brasilia, DF, a Brazilian firm that grows and processes coffee beans. Gibson has a patent for a new coffee processing method. This intellectual property is motivating Gibson to expand beyond importing coffee to engaging in a joint venture to process the coffee. Gibson will invest $8 million in the proposed joint venture project, which will help to finance Brasilia 's production using the newly patented process.

The Brazilian government has guaranteed that the after-tax profits (denominated in Reals, the Brazilian currency) can be converted to US dollars at the current exchange rate and sent to the Gibson Company each year. Current exchange rates can be found at http://www.oanda.com.

For each of the first five years, 60 percent of the total profits will be distributed to Brasilia, while the remaining 40 percent will be converted to dollars to be sent to Gibson. The income tax rate for the joint venture will be 10%. However, the Brazilian government is considering raising the income tax rate to 30%. At the present time, the Brazilian government doe not impose a separate income tax on profits sent out of the country. However, the Brazilian government is considering imposing an additional 10 percent income tax on profits distributed to a foreign company. Assume that there are no other forms of tax. After considering the taxes paid in Brazil, assume an additional seven percent tax imposed by the US government on profits received by Gibson Company.

The expected total profits resulting from the joint venture per year are as follows:

Year	Total Profits from Joint Venture (in BRL)
1	40 million
2	60 million
3	70 million
4	90 million
5	120 million

Gibson's average cost of debt is 6 percent before taxes. Its average cost of equity is 9 percent. Assume that Gibsonï¿½s US income tax rate is 10 percent. Gibsonï¿½s capital structure is 70 percent debt and 30 percent equity. Gibson adds between 2 and 5 percentage points to its cost of capital when deriving its required rate of return on international joint ventures. Gibson plans to account for country and other risks within its cash flow estimates.

Gibson is concerned about country risk in the following two forms:

(1) Will the Brazilian government increase the corporate income tax rate from 10 percent to 30 percent (20 percent probability)? If this occurs, Gibson will receive additional tax credits on its US taxes, resulting in no US taxes on the profits from this joint venture.

(2) Will the Brazilian government impose a separate income tax of 10 percent on the profits distributed to foreign companies such as Gibson (20 percent probability)? If this occurs, Gibson will not receive additional tax credits, and the company will still be subject to US tax on the profits from this joint venture.

Assume that the two types of country risk are mutually exclusive. If it does anything, the Brazilian government will only implement one of these changes in its tax policies (i.e., the increase in the basic income tax on the profits of the joint venture or the additional income tax on profits distributed to foreign companies). The Brazilian government may also choose to leave things as they are.

Assignment

7. Discuss the benefits of the joint venture from the perspective of Brasilia. What is the maximum amount of money Brasilia should invest?

1. (TCOs 2, 4, 5, 6) The idea that the assisted suicide of terminally ill patients should be allowed simply at the patient's direction reflects what type of ethics? (Points: 5)

Hobbes' State of Nature
Rand's Objectivism
Aristotle's concept of Virtue
Thomas Aquinas' concept of conscience
Socrates' concept of excellence

Question 2.2. (TCOs 1, 2, 7) What is the moral ideal of compassion? (Points: 5)

Acts of unmerited kindness
Sentiment in response to the suffering of others
Acknowledging the sufferings of others
Acts of altruism
Acts contrary to Objectivism

Question 3.3. (TCOs 1, 2) One of the common errors in Ethics is that of the double standard. The double standard consists of what? (Points: 5)

Discriminating in the application of ethical criteria based on our own preferences
Setting aside ethical criteria in special cases
Taking steps to avoid condemnation of others
Using one set of criteria for judging cases concerning ourselves and another for all others
Suspending judgment when concerned that the consequences would be too severe

Question 4.4. (TCO 2) Prescriptive language is commonly used in ethics for what reason? (Points: 5)

To indicate what is prohibited or impossible
To indicate that one choice is better than others
To show what actions are legal
To convey requirements and obligations
To indicate that there are really no choices available

Question 5.5. (TCOs 7, 8) Each person ought to do whatever will best promote his or her own interests. (Points: 5)

Utilitarianism
Kant's Categorical Imperative
Social Contract Theory
Ethical Egoism
Gilligan