Chapter 13 – Strategic Accounting Issues in Multinational Corporations
Sales (25,000 units @ $50)
1,250,000
Project cash flow to Sedona:
(a)
Flow in
Thousands
Year 15% PV
factor
PV of
flow
Cost of project
$1,500
0
1.000
(1,500)
(b)
Since current exports will now be lost in any case, the lost profits on current exports are
not an incremental flow.
Flow in
Thousands
Year 15% PV
factor
PV of
flow
Cost of project
$1,500
0
1.000
(1,500)
13-1
McGraw-Hill Education.
Chapter 13 – Strategic Accounting Issues in Multinational Corporations
13-2
McGraw-Hill Education.
Chapter 13 – Strategic Accounting Issues in Multinational Corporations
(c)
Cash flow to the U.S. parent would not change, because the drop in Chinese taxes will
be offset by an equal increase in U.S. taxes on profit remitted to the U.S.
Pre-tax profit (original projection)
Less: 20% Chinese taxes
Net income – dividend to U.S.
$525,00
0
-105,000
420,000
5. The risk management activities of Nokia Company cover strategic, operational, financial,
and hazard risks. Financial risk management (identifying, evaluating and hedging) is one
of the two main objectives of the Treasury function. Since a substantial proportion of
6. It is clear that U.S. companies place much more emphasis on profit oriented goals
compared to Japanese companies, which place more emphasis on sales volume and
production costs.
13-3
McGraw-Hill Education.
Chapter 13 – Strategic Accounting Issues in Multinational Corporations
7. There is increasing recognition internationally that focusing on financial measures alone
is not sufficient in managing the business, and other factors such as customer
8. The statement is correct in that it is not always possible to clearly separate the
performance of a subsidiary from that of its managers, because costs often cannot be
classified as either completely controllable or completely uncontrollable and are
9. It would be appropriate to evaluate the performance of a foreign subsidiary in terms of
local currency (rather than in terms of parent currency) when the foreign subsidiary is not
10. The complexities in developing global business strategies arise mainly from the diversity
in business environments internationally. Economic and legal environments vary across
countries and are reflected in differences in the level of economic development,
13-4
McGraw-Hill Education.
Chapter 13 – Strategic Accounting Issues in Multinational Corporations
11. This question should be answered by the student stating whether or not they agree with
the view expressed, and then developing a discussion in a logical fashion to support the
position taken. The main points that could be considered in such a discussion include the
following:
Globalization is a process that leads to convergence of markets internationally,
making national boundaries irrelevant. Globalization is also associated with a
particular set of market-based values, such as the use of capital market oriented
On the other hand, research has shown over and over again that different societies
have different cultural value orientations and that these cultural values influence
every aspect of life, for example, the behavior patterns as managers, employees and
What we have is a situation where two forces going in opposite directions, the force
of globalization in the direction of convergence, and the force of culture emphasizing
13-5
McGraw-Hill Education.
Chapter 13 – Strategic Accounting Issues in Multinational Corporations
Case 13-1 CANYON POWER COMPANY
Solution
Project Perspective (in Indian Rupees)
Year 1 Year 2 Year 3 Year 4
Units
Price
(Rs.) Total (Rs.) Units
Price
(Rs.) Total (Rs.) Units
Price
(Rs.) Total (Rs.) Units
Price
(Rs.) Total (Rs.)
Sales
Local 5,000
4,500.0
0
22,500,00
0
6,00
0
4,950.
00
29,700,00
0
7
,000
5,445.0
0
38,115,00
0
8,00
0
5,989.5
0 47,916,000
Export
10,00
0
4,5
00.00
45,000,00
0
12,00
0
4,
950.00
59,400,00
0
14,00
0
5,445.
00
76,230,00
0
16,00
0
5,989.
50 95,832,000
13-6
Chapter 13 – Strategic Accounting Issues in Multinational Corporations
13-7
Chapter 13 – Strategic Accounting Issues in Multinational Corporations
Net Present Value: Year 1 Year 2 Year 3 Year 4 Total
Total annual cash flows
4,800,0
00
26,400,0
00
51,645,0
00
64,048,0
00
Present value factor
Initial Investment: $ Ex. Rate Rs.
67,500,00
13-8
Chapter 13 – Strategic Accounting Issues in Multinational Corporations
Parent Company Perspective (in U.S. dollars)
Year 1 Year 2 Year 3 Year 4 Total
Exchange Rate Rs. 45 Rs. 43 Rs. 40 Rs. 38
Royalties (Rs. 20,000,000) $ 444,444 $ 465,116 $ 500,000 $ 526,316
The positive NPV from both the project and parent company perspectives would suggest that the proposal should be
accepted. Students should explore other issues to be considered before making a final decision including, for example,
conducting a sensitivity analysis.
Note:
13-9
Chapter 13 – Strategic Accounting Issues in Multinational Corporations
Case 13-2 LION NATHAN LIMITED
Lion Nathan is a typical case of a company, which has grown from its humble beginnings to
become a large MNC, one of Australasia’s largest brewery companies. The purpose of this
case is to highlight some of the accounting and related issues faced by companies like Lion that
enters into foreign markets that are different in many ways from those of their own countries.
Students are expected to prepare a report identifying the main strategic issues related to Lion’s
Chinese operation.
13-10
Education.
Chapter 13 – Strategic Accounting Issues in Multinational Corporations
Lion Nathan had three opportunities in China. First, the opportunity to build brand loyalty and
promote good ethical international business relations. Second, the opportunity to promote
quality products that were consistent over time. As a result, other local and state run breweries
were forced to adhere to the same quality of product not to be forced out of the market in China.
Third, the opportunity to employ numerous local Chinese people in both Shanghai and the
Yangtze River Delta.
Threats-
13-11
Education.