Question

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?

Answer 1

Sales	Units	Price per Unit (SF)	Amount
A	B	C	D=B*C
Domestic Sales	30,00,000	15	4,50,00,000
Exports	30,00,000	20	6,00,00,000
Total Revenue 'E			10,50,00,000
Costs
Direcy Cost	60,00,000	10	6,00,00,000
Fixed Overhead			60,00,000
Depreciation (H)			10,00,000
Total Cost F			6,70,00,000
Earnings before tax (E-F)			3,80,00,000
Tax @30% (E-F)*0.3			1,14,00,000
Earnings after tax (G)			2,66,00,000
Add back Depreciation
Cash Flows I=(G+H)			2,76,00,000
Exchange Rate @$0.75/SF
Cash Flows in $ (I*0.75)			2,07,00,000

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