Assignment

1. Suppose Navistar's Canadian subsidiary sells 1,500 trucks monthly to the French affiliate at a transfer price of 527,000 per unit. Assume that the Canadian and French marginal tax rates on corporate income equal 45% and 50%, respectively. (16.1)

a. Suppose the transfer price can be set at any level between $25,000 and $30,000. At what transfer price will corporate taxes paid be minimized? Explain.

b. Suppose the French government imposes an ad valorem tariff of 15% on imported tractors. How would this tariff affect the optimal transfer pricing strategy?

c. If the transfer price of 527,000 is set in euros and the euro revalues by 5%, what will happen to the firm's overall tax bill? Consider the tax consequences both with and without the 15% tariff.

d. Suppose the transfer price is increased from $27,000 to $30,000 and credit terms are extended from 90 days to 180 days. What are the fund-flow implications of these adjustments?

3. Suppose that DMR SA, located in Switzerland, sells $1 million worth of goods monthly to its affiliate DMR Gmbh, located in Germany. These sales are based on a unit transfer price of $100. Suppose the transfer price is raised to $130 at the same time that credit terms are lengthened from the current 30 days to 60 days. (16.3)

a. What is the net impact on cash flow for the first 90 days? Assume that the new credit terms apply only to new sales already booked but uncollected.

b. Assume that the tax rate is 25% in Switzerland and 50% in Germany and that revenues are taxed and costs deducted upon sale or purchase of goods, not upon collection. What is the impact on after-tax cash flows for the first 90 days?