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Word Count: 340
Southport Minerals Inc is the largest sulphur producer in the United States Due to a shortening of supply over the past few years Southport has enjoyed enormous profits and is extremely liquid with a debtequity ratio of 02 Currently sulphur production accounts for 90 of Southports revenue The company is searching for non-acquisition diversification opportunities Southport has been presented with the opportunity to develop a copper mine in Indonesia Increased uses of copper and rising copper prices have led Southport to consider this opportunity However the location of the copper mine and the political environment in Indonesia are risks that must be considered The company has acquired the proper financing to proceed with the project However they must decide how to discount the cash flows to determine if the project is acceptable Southport has decided to proceed with the project under a subsidiary Southport Indonesia Several reasons support the choice of creating a subsidiary rather than doing business as the current corporation First the translation of foreign currency must be considered If operating under one corporate entity each transaction must be translated This would lead to a degree of discrepancies creating confusion Also differences in tax and accounting regulations are a consideration Foreign countries have different accounting systems and tax plans Therefore two sets of book would be needed to reconcile foreign and domestic statements Third a separate entity creates shelter against political risk The parent company is protected from political turmoil inside the foreign country Southport has already had property expropriated in Cuba The board is very wary of any future foreign risks Any protection that Southport can guarantee the board will help sell the position In order to avoid potential distortions caused by foreign currency conversion Southport should conduct the entire cash flow forecasting in the Indonesian currency Also Southport must consider the cross-country tax rate associated with Indonesia Once the cash flow analysis is done in the foreign currency the income transferred
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