A Chinese automobile company is going to use one of its unused manufacturing plants in China to produce 20,000 cars a year. The cars will then be sold in the United States for $40,000 per vehicle. The plant has been fully depreciated. Production and assembly costs in China will be RMB 120,000 per vehicle and selling and administrative costs in the U.S. will be $30 million per year. The company will pay taxes in China at a rate of 35% and will not pay taxes in the U.S. Assume the current exchange rate is 7 RMB/$. It is expected that the plant will operate for 5 years and then cease operations. What are the expected yearly sales, expressed in RMB, assuming the current exchange rate? 5,600,000,000 800,000,000 560,000,000 3,600,000,000 What is the expected yearly net after-tax cash flow, expressed in RMB, assuming the exchange rate stays constant? 5,600,000,000 1,943,500,000 3,170,000,000 2,990,000,000 What is the change in cash flow, in RMB, if the RMB appreciates to 6.5 RMB/$? +385,000,000 -385,000,000 +250,250,000 -250,250,000 What effect would it have on the foreign exchange risk if the company decides to shift some of the car assembly to the U.S.? It would increase the risk It would decrease the risk The risk would remain the same

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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A Chinese automobile company is going to use one of its unused manufacturing plants in China to produce 20,000 cars a year. The cars will then be sold in the United States for $40,000 per vehicle. The plant has been fully depreciated.

Production and assembly costs in China will be RMB 120,000 per vehicle and selling and administrative costs in the U.S. will be $30 million per year.

The company will pay taxes in China at a rate of 35% and will not pay taxes in the U.S.

Assume the current exchange rate is 7 RMB/$. It is expected that the plant will operate for 5 years and then cease operations.

What are the expected yearly sales, expressed in RMB, assuming the current exchange rate?
1. 5,600,000,000
2. 800,000,000
3. 560,000,000
4. 3,600,000,000

What is the expected yearly net after-tax cash flow, expressed in RMB, assuming the exchange rate stays constant?

1. 5,600,000,000
2. 1,943,500,000
3. 3,170,000,000
4. 2,990,000,000

What is the change in cash flow, in RMB, if the RMB appreciates to 6.5 RMB/$?

1. +385,000,000
2. -385,000,000
3. +250,250,000
4. -250,250,000

What effect would it have on the foreign exchange risk if the company decides to shift some of the car assembly to the U.S.?

1. It would increase the risk
2. It would decrease the risk
3. The risk would remain the same

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