Answers to Questions
1. A strategy indicates the general direction in which a firm plans to move to attain its goals.
2. A strategy indicates the general direction in which a firm plans to move to attain its goals.
3. Accounting provides the skills necessary to quantify in financial terms the factors that
influence strategy formulation — strengths, weaknesses, opportunities and threats –, and to
4. Both NPV and IRR are discounted cash flow techniques (recognizing the time value of
money) used for evaluating capital investment proposals. The NPV method uses a discount
rate (usually, the firm’s cost of capital) to restate all future net cash inflows in terms of their
5. The organizational structure of a MNC is determined to a considerable extent on the roles
assigned to its subsidiaries. Some subsidiaries play the role of a producer of products for
6. Due to cultural differences across countries, corporate managers may have to tailor the
manner in which strategy is implemented in a specific country in order to achieve the
7. The role of accounting in implementing multinational business strategy is to assist the
process by which managers influence other members of the organization. Accounting fulfills
this role primarily through the budgeting process, in particular, operational budgeting. An
8. One of the main issues in designing an appropriate performance evaluation system for a
foreign affiliate relates to the selection of the criteria to be used in evaluating performance.
This is critical because correctly selected criteria can act as a motivating factor within the
unit. However, if not done carefully, evaluation criteria can have dysfunctional effects. Firms
9. MNCs often use financial measures in evaluating foreign subsidiary performance, mainly
due to the fact that the information is readily available from the financial statements.
10. The factors that influence the manner in which a particular subsidiary should be treated
include the strategic role assigned to the subsidiary, and the level of responsibility given to
its management. For example, if the role assigned to a particular subsidiary only requires it
11. It is important to separate the performance of a subsidiary from that of its management for
evaluation purposes, mainly because the performance of a subsidiary can be influenced by
decisions made by corporate management and other parties, events that are beyond the
12. Several issues must be addressed in measuring the profit of a foreign subsidiary for performance
evaluation purposes. These include:
13. During a period of inflation, asset values based on historical costs often understate their
current values. Lower asset values result in higher profits through lower depreciation and
Solutions to Exercises and Problems
1. For capital budgeting purposes, the U.S. company needs to determine the after-tax cash
inflow in U.S. dollars arising from the royalty payment. Three factors will affect the net
2. In this exercise, students are expected to select a developing country and find the relevant
3. If the exchange rate is expected to remain constant, then the real dollar value of the German
mark is expected to decline at the same rate as the real mark value, namely the 5% German
4. The exchange rate between the Chinese RMB and the U.S. dollar is expected to remain
Project cash flow in China: