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

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