Questions (uses a 9% discount rate)
1. Estimate the expected annual cash flows for the 25 years of the ship's useful life. Assume that ShipA is a U.S. firm subject to 35% taxation.
2. Do you think that the ship should be scrapped after 15 years as per the company's policy or continue to operate through the entire 25-year period? Assume that the company estimated the scrap value to be $5 million if the ship is scrapped in year 15 and $6.72 million if the ship is scrapped in year 25.
3. Should Mr. Schwarzenegger purchase the $39M capesize? What if ShipA is located in Hong Kong, where owners of Hong Kong ships are not required to pay any tax on profits made overseas and are also exempted from paying any tax on profit made on cargo uplifted from Hong Kong?
4. How would you recommend Mr. Schwarzenegger to reorganize his multinational corporation in order to optimize its transfer pricing and taxes.