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

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