Question

Calculate the effective annual cash flows to a parent company, given the following information.

A U.S. based MNC has a subsidiary in the United Kingdom to which it provides periodic management consulting services by sending a consultant to the U.K. four times a year. The consultant holds seminars and provides other services to the subsidiary in its main offices. Each time the consultant works 25 hours in seminars and one-on-one consulting. The Parent company’s cost of hiring the consultant services is $860 dollars per hour (travel and accommodation expenses inclusive). The parent MNC bills its subsidiary $1,120 per hour for the consultant’s services. Assume that the payments for the consulting services is done once in total at the end of the hear. The subsidiary produces and sells sporting equipment. Its average annual sales are 24,000 units that it sells at an average price of $1,200 per unit. The variable costs associated with this production is $700/unit. Fixed costs (other than depreciation expense) are $6.8 million per year. The annual depreciation expense is $3 million. Ignore working capital requirements. The tax rate for both parent and subsidiary is 30%.

Answer 1

Note :

1.It is assumed that nothing is payable or receivable at the end of the year.

2. No depreciation in the books of parent company because of lack of information.

3. It is assumed that remaining balance in the hands of subsidiary is available for repatriation wihtout any charges or taxes.