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The land and buildings will be disposed of at the end of the project and their tax
exempt value is expected to increase at an annual rate of 30% throughout the four?year life
of the investment.
All components for the new bicycle will be produced or purchased in Canvia except for a
gearing system component which will be manufactured by Colvin Co in the eurozone. The
cost of acquiring this component from the eurozone is already included in the pre?tax
contribution estimates, based on a transfer price of €10 per component. The finance
director estimates a manufacturing cost of €2 per component.
Please explain meaning of these lines and its impact in answer.
As far as the cash flows in Canvia are concerned, the gearing system component is a cash outflow. However since the question says that the cost has already been included in the pre-tax contribution estimates, there is no extra flow to consider.
As far as the cash flows to Colvin are concerned, Colvin will be receiving the remittances from Canvia and will also be getting the contribution from the gearing system components that they are selling to Canvia.