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Dear Sir,
I’m having some difficulty with the June 2015 Q1 (Yilandwe), even after looking at most of the questions and answers on this forum.
1) Why is the royalty fee deducted in YR and then added back in $?
2) (this is more for my knowledge) Why would Imoni even be collecting Royalty fees?In my opinion, the royalty fee in this investment project affects two sources of cashflows, being the remittable flows from yilandwe (in YR)and cashflows earned by Imoni Co. from this project in the USA(in $). Therefore, the royalty fee subtracted from the first source of cashflow is added back to the second.
tyelle1217: Although what you have written is correct, please do not answer in this forum because it is Ask the Tutor.
nickstar: Whenever the question involves investment in a foreign country, there need to be two separate cash flow calculations. First we need the cash flows in the foreign country (of which one is the payment of royalties), including the tax in the foreign country, which leads to the amounts remitted to home country.
Then we need to convert the remittances to the home currency, bring in any other cash flows (of which one here is the receipt of the royalties) and any addition tax in the home country.
Then we can discount.There are two likely reasons (in general) for collecting royalties. One is to overcome any limits by the government of the foreign country on remittances abroad. The other is for tax reasons depending on the relative tax rates in the two countries and any special tax rules that might relate to royalties.
Thank you sir, I now understand the need for the two cash flow statements and why the royalties were added back into the cash flows in the home country. However I’m still confused as to why the royalties were deducted from the foreign country, since the company would be receiving the royalties and is therefore not an outflow?
And also if royalties are deducted from the first cash flow, why isn’t the contribution from the components deducted as well?
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