Operating Cash Inflows from Foreign Subsidiary

We invest to earn returns. Inflows come from Operations (Sales) and Terminal Value (Sale of factory).

1. Steps to Estimate Inflow

1. Estimate Sales Volume: How many units will we sell in Vietnam?
2. Estimate Price per Unit: Adjusted for Vietnamese Inflation.
3. Calculate Operating Profit: Sales - Cost - Tax.
4. Add Back Depreciation: Depreciation is a non-cash expense. It saves tax but cash doesn't leave the firm.
   • Cash Flow = Net Profit + Depreciation.

2. The Conversion Problem (Forex)

You have the cash flow in Vietnamese Dong (VND). But the Parent is in India (INR).

• Step: Convert VND to INR using Forecasted Exchange Rates.
• Note: If Vietnam has high inflation, the Dong will depreciate. Your VND profits will look big, but when converted to INR, they might shrink.

3. Terminal Value (Salvage Value)

At the end of Project Life (e.g., Year 5), we sell the business.

• Book Value Method: Sell at Net Asset Value.
• Perpetuity Method: Cash Flow / Cost of Capital.

4. Exam Notes: Writing the Answer

Question: "How are Operating Cash Inflows estimated for a foreign project?" (5 Marks)

Answering Strategy:

1. Formula: CFAT = (Sales - Cost - Tax) + Depreciation.
2. Adjustment 1: Inflation adjustment for Price/Cost.
3. Adjustment 2: Exchange Rate adjustment for Repatriation.

Summary

• Cash is King: We care about "Cash Flow Available for Repatriation", not just Accounting Profit.
• Depreciation: We love depreciation because it reduces Tax Outflow.

Quiz Time! 🎯

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