Suppose you are analyzing the projected profitability of an international subsidiary’s cash flows from the parent’s perspective that would result from a potential capital investment. How should you handle each of the following in calculating the cash flows that come to the parent? Be specific.
1) An increase of $300,000 per year in the transfer price of intermediate goods charged to the subsidiary that will result from the new investment.
2) The $2,000,000 decline in Brazilian revenues that will result from lost tax incentives in the Brazilian subsidiary if the firm shifts production out of Brazil and into its new Indonesian subsidiary.