Documente Academic
Documente Profesional
Documente Cultură
Investment Appraisal
Forecasting Exchange Rate
Purchasing Power Parity
S1 = So x [(1+inflation rate of 1st currency)/ (1+inflation rate of 2nd currency)]
EXAMPLE:The Current Dollar Sterling exchange rate is given $/£ 1.7050
Expected Inflation Rates are:
Year USA UK
1 5% 2%
2 3% 4%
3 4% 4%
Find the expected spot rate for next three years.
SOULTION:
Year Calculation Future Expected Spot
Year 1 1.7050 x (1.05/1.02) 1.7551
Year 2 1.7551 x (1.03/1.04) 1.7382
Year 3 1.7382 x (1.04/1.04) 1.7382
©ACCA
Impact of Taxation
The level of taxation on a project’s profits will depend on the relationship between the tax rates in the home
and overseas country.
The question will always assume a double-tax treaty project always taxed at higher rate.
EXAMPLE:
What will be the rate of tax on a project carried out in the US by a UK company in each of the
following scenarios? Parent co is in UK
Scenario'
UK TAX US TAX
s
A 33% < 40%
B 33% = 33%
Scenario A – No further UK tax to pay on the project’s $ profits. Profits taxed at 40% in US.
Scenario B – No further UK tax to pay on the project’s $ profits. Profits taxed at 33% in US.
Scenario C – Project’s profits would be taxed at 33%. 25% in US and further 8% tax payable in
the UK on gross USA earnings
©ACCA
Inter-Company Cash flows
Inter-company cash flows, such as transfer prices( inter company transactions), royalties and management
charges, can also affect the tax computations.
Example: A project carried out by a US subsidiary of a UK company is due to earn revenues of $100m in the US in
Year 2 with associated costs of $30m. Royalty payments of $10m will be made by US subsidiary to UK. Assume tax
is paid at 25% in the US and 33% ; and assume a forecast $/£ spot rate of $1.50/£.
What are the cash flows associated with the project?
Year 2 $m UK Tax Computation:
Revenues 100
UK Tax on $ profits – 33% - 25% =8%
Costs (30)
Royalties (10) 8% UK tax on $ profits: $60m/1.50 = £40m
: £40m x 0.08 = £3.2m
Pre-Tax profit 60 33% UK Tax on Royalties = £6.7m x 0.33 = £2.2m
25% US Tax (15)
** UK TAX PAYABLE : £ 5.4m
Remit to Parent 45*
£ Cash Flow 30 - *45/1.50
Royalties 6.7 $10m/1.50
UK Tax (5.4)**
©ACCA
After Tax Cash £31.3m
flow
Remittance Restriction
Remittance occurs where an overseas government places a limit on the funds the can repatriated
back to the holding company.
This restriction will change the cash flows that are received by the holding company.
Example:
A project’s after US-tax $ cash flow is as follows ($m):
YEAR 0 1 2 3
(10) 3 4 6
In any one year, only 50% of cash flows generated can be remitted back to the parent. The blocked funds can be
released back to parent in the year after the end of project