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7 July, 16:27

Consider a Swiss subsidiary (Swiss AS) of a US firm, Kendall Systems. The current exchange rate is $0.80/SF. Swiss AS sells 6 million units, of which 3 million are sold at home and 3 million are exported selling at SF15/unit. It has fixed overhead costs of SF 6 million and direct costs (labor, raw material, etc.) of SF 10/unit. The firms has a straight line depreciation of SF 1 million each year and has a tax rate of 30%.

As a result of sudden depreciation of SF from $0.80/SF to $0.75/$, prices remain same at home (SF15 / unit) but there is an increase in export prices to SF20 / unit). Costs remain same.

Find the Cash flows in $ post-depreciation of SF?

a.

$21.28 million

b.

$20.70 million

c.

$19.95 million

d.

$22.08 million

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Answers (1)
  1. 7 July, 16:47
    0
    The Cash flows in $ post-depreciation of SF is $20.70 million. The right answer is b

    Explanation:

    To calculate the Cash flows in $ post-depreciation of SF we would to have to make the following table:

    Description Domestic sale Export sale Total

    Selling revenue -

    (3000000*15) 45,000,000 45,000,000

    (3000000*20) 60,000,000 60,000,000

    Variable cost

    (3000000*10) (30,000,000) (30,000,000)

    (3000000*10) (30,000,000) (30,000,000)

    Contribution 45,000,000

    Fixed cost (6,000,000)

    Depreciation (1,000,000)

    Profit before tax 38,000,000

    Tax 30% (11,400,000)

    Profit after tax 26,600,000

    Add depreciation 1,000,000

    Cash profit after tax 27,600,000

    Exchange rate $ 0.75

    Cash flow in USD 27,600,000*0.75

    Cash flow in USD $ 20,700,000

    The Cash flows in $ post-depreciation of SF is $20.70 million
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