Carlton Germany ( from our ex) decides not to change its domestic price of €12.80 per unit within Europe, but to raise its export price (in €) from €12.80 per unit to €15.36 per unit, thus preserving its original dollar equivalent price of $15.36 per unit. Volume in both markets remains the same, because no buyer perceives that the price has changed.
Carlton Germany finds that domestic costs increase in proportion to the drop in value of the €, because of local inflation and a rise in the cost of imported raw materials and components. The rise in costs (+20%) applies to all cash costs, including direct costs and fixed cash operating costs. However, it does not apply to depreciation. Because of the increase in its costs, Carlton Germany increases its sales price in € from €12.80 per unit to €15.36 per unit.
For each scenario
a. What is the impact on cash flow?
b. What is the impact on working capital needed?
c. What is the impact on the present value approach to measuring operating measure?