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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.
Good day sir, for Colvin question on the special packaging profit we have included the profit (€10-€2)=€8 in home country. Whereas in this question we don’t have to add additional outflow for foreign company as in the question has mentioned it has been included in the pre-tax contribution estimates.
My doubt is that if the question didn’t mentioned it was included in pre-tax contribution estimates, then we will include €10 as their outflow expenditure right sir?
For inter-company transaction = for home country is based on the profit earned ; for foreign country is based on the overall purchase price from home country.
Right sir?
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