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Chapter 5: Exercise 4 (p. 218)Sedona Electronics of Arizona exports 25,000 Disc Drive Controllers (DDCs) per year to China under an agreement that covers theperiod 2009-2013. In China the DDCs are sold for the RMB (Chinese currency) equivalent of $50 per unit. The total costs in the U.S. are direct manufacturing costs and shipping costs, which amount to $35 per unit. The market fro DDCs in China is stable, andSedona holds the major portion of the market. In 2010, the Chinese government, adopting a policy of replacing imported DDCs with local products, invited Sedona to open an assembly plant in China. If Sedona makes the investment, it will operate the pant for five years and then sell the building and equipment to Chinese investors at net book value at the time of sale plus the current amount of any working capital. Sedona will be allowed to repatriate all net income and depreciation funds to the U.S. each year. Sedona’s anticipated outlay in 2010 would be $1,500,000 (buildings and equipment $750,000 and working capital $750,000). Buildings and equipment will be depreciated over five years on a straight-line basis (no salvage-value). At the end of the fifth year, the $750,000 of working capital may also be repatriated to the U.S. Locally assembled DDCs will be sold for the RMB equivalent of $50 each. Operating expenses per unit of DDCs are as follows: Materials purchased in China (dollar equivalent of RMB cost): $15Components imported from U.S. parent: $8Variable cost per unit: $23The $8 transfer price per unit for components sold by Sedona to its Chinese subsidiary consists of $4 of direct costs incurred in the U.S. and $4 of pretax profit to Sedona. There are no other operating costs in either China or the U.S. In both China and the U.S., corporate income tax rate is 40 percent. Sedona uses a 15 percent discount rate to evaluate all its investment projects. Assume the investment is made at the end of 2010, and all operating cash flows occur at the end of 2011 through 2015. The RMB/Dollar exchange rate is expected to remain constant over the five-year period. a) Do you recommend that Sedona make the investment? b) Sedona learns that if it decides not to invest in China, A Japanese company will probably make an investment similar to that being considered by Sedona. The Japanese investment would be protected by the Chinese government against imports. How would this information affect your analysis and recommendation? c) Assume the conditions of question (b). China reduces income tax charged to foreign firms from 40 percent to 30 percent in order to attract foreign investors. How would this information affect your analysis and recommendation?
Exercise 8 (p. 219)Explain the possible reasons for the popularity of the balanced scorecard.8. It is impossible to separate the performance of a foreign subsidiary from that of its managers, and there is no needfor it.
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Revenue, Taxation in the United States, Generally Accepted Accounting Principles, Earnings before interest and taxes, gross profit margin