Mr L Knopp

ASSIGNMENT 02

Due date: 20 September 2013

Unique number: 364176

Student Number: 32521723

Subject: FIN4802 INTERNATIONAL FINANCIAL MANAGEMENT

Answer 1

a) Projected Annual Cash Flow for Albion Computers

Sales (40,000 units at £1,080/unit) £43,200,000

Variable Costs (40,000 units at £671/unit) 26,840,000

Fixed Overhead costs 4,000,000

Depreciation allowances 1,000,000

_________

Net Profit Before Tax £11,360,000

Income Tax (at 50%) 5,680,000

Profit after Tax 5,680,000

Add back depreciation 1,000,000

_________

Operating cash flows £ 6,680,000

Operating cash flows in $ (£ 6,080,000x1.5) $ 10,020,000

b) Projected Operating Gain/Losses over 4 yrs Benchmark Current Case

Sales £50,000,000 £43,200,000

Variable Costs 32,500,000 26,840,000

Fixed Overhead costs 4,000,000 4,000,000

Depreciation allowances 1,000,000 1,000,000

_________ _________

Net Profit Before Tax £12,500,000 £11,360,000

Income Tax (at 50%) 6,250,000 5,680,000

Profit after Tax 6,250,000 5,680,000

Add back depreciation 1,000,000 1,000,000

_________ _________

Operating cash flows £ 7,250,000 £ 6,680,000

Operating cash flows in $ (£ 6,080,000x1.5) $ 11,600,000 $10,020,000

4 –year present value ($) a $ 33,118,000 $ 28,606,883

Operating gains/loss ($) b -$ 4,511,117

a- The discounted present value of dollar cash flows was computed over a four year period using a 15% discount rate. A constant cash flow is assumed for each of four years (as per information provided in Assignment Question).

b- Operating gains or losses represent the present value of change in cash flows, which is due to pound depreciation, from the benchmark case.

c) In this case, Albion can expect to operating losses due to a depreciation of the British Pound. This is mainly...