Suppose that a U. S. computer company has wholly owned British and Japanese subsidiaries, Albion Computers PLC, that manufactures and sells personal computers in both British and Japanese markets. Albion Computers imports microprocessors from Intel, which sells them for $ 480 per unit. Albion Computers hires British and Japanese workers and sources all the other inputs locally. The company expects to sell 50,000 units of personal computers per year at a selling price of £ 1,000 in the British market and 40,000 units per year at a selling price of ¥180,000 per unit in the Japanese market. In addition to imported input cost from Intel, the unit variable cost for the locally sourced inputs is £ 300 and ¥85,000 in the British and Japanese markets, respectively. Each year, Albion incurs fixed overhead costs of £ 3.5 million in UK and ¥680 million in Japan for rents, property taxes, and the like, regardless of output level and £ 1.5 million in the UK and ¥300 million in Japan for depreciation allowances. Albion faces a 40% income tax rate in the UK and 35% in Japan., and assume that the exchange rate will remain unchanged at $ 1.50/£ and $0.0083/¥ .
a. Compute the combined projected annual cash flow in dollars for both British and Japanese markets.
Now, assume that the pound may appreciate from $ 1.50 to $ 1.53 per pound and yen may depreciate from $0.0083 to $0.0079 per yen. Also, both the selling price and the price of locally sourced inputs increase at the rate of 8 percent, reflecting the underlying inflation rate in both markets.
b. Compute the combined projected operating gains/losses over the five-year horizon as the discounted present value of change in cash flows (using 14% as the discount rate), which is due to the pound appreciation and yen depreciation.