Suppose there is an American owned company in England that imports raw materials

Question

Suppose there is an American owned company in England that imports raw materials from the U.S. and then sells the final product to both British customers & US customers. Assume the following: Exchange rate is pounf 2/8 Total sales-units 1 million U.K. - 500,000 units at pound 10/unit US. - 500,000 units at $5/unit Tax rate is 50% Deprecation is pound 1 million 1yr Cost of Goods sold per unit Raw materials for the US (cost/unit) $3 British labor costs(cost/unit) pound 2 What are the cash flows from operations in dollars for the yr?

Explanation / Answer

Cash flow from the operating unit would be :

Hence the answer is 5.5 million dollars therefore none of the options are right hence the answer is option E

Year 1 Unit Sales 1000000 Price U.K pounds 10 Price U.s dollars 5 Revenue Pounds to dollar 10000000 Revenue U.s 2500000 Total revenue 12500000 Variable costs U.S 3 per unit 1500000 Variable cost pounds 2000000 Total variable cost 3500000 Depreciation 2000000 EBIT (revenue - variable - depreciation) 7000000 Interest 0 Profit before tax 7000000 Tax 50% 3500000 Net Income 3500000 Cash flow = net income + dep 5500000

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