Reference no: EM13578109

Roadmaster, an Australian Company, has subsidiaries in Japan and Hong Kong. The income tax rates are 40 % for Australia and Japan and 15 % for Hong Kong. The company plans on buying a fleet of 100 Toyotas in Japan and leasing the cars to lessees in Australia. Roadmaster has three alternatives they are considering:

(1) Have the Japanese subsidiary purchase the cars for $3,800 each and sell them to the Australian parent company for $8,000 each. [see 8,000 outflow on solution]

(2) Have the Japanese subsidiary purchase the cars for $3,800 each and sell them to the Hong Kong subsidiary for $4,400 each. Then, have the Hong Kong subsidiary sell them to the Australian parent company for $8,000 each. The cars are not actually shipped to Hong Kong.

(3) Have the Japanese subsidiary purchase the cars for $3,800 each and sell them to the Australian parent for $4,400 each.

Transportation costs of shipping from Japan to Australia are $200 per car (the Japanese subsidiary pays for this). Lease receipts (less operating expenses) per car in Australia are $5,000 for the first year, $3,500 for the second year, and $2,000 for the third year.

Required

1. From a MANAGERIAL PERSPECTIVE, evaluate each alternative and make a recommendation. Attempt to maximize the net present value of the after tax net cash inflows to Roadmaster. Assume that the cars have a 3-year life and no salvage value for tax purposes. Roadmaster uses SYD depreciation (which depreciates 3/6 of the cost the first year, 2/6 the second year, and 1/6 the third year) and has a 15% cost of capital. Use the following for present value calculations: (1/1.15) = .87;

1/(1.15)2 = .76; 1/(1.15)3 = .66). Assume that all cash flows (including taxes) from purchase, transportation, import duties, and taxes on the sales of the cars occur immediately. Cash flows from leasing the cars and depreciation tax shields are taken at the end of each year. Import duties in Australia are 5% of purchase price and do not affect the depreciable base but are deductible for income tax purposes (in Australia).

2. If each country manager is evaluated based on after tax net income, which alternative is preferred by each of the three country managers?

3. What other factors must be considered?