One Element of the General Transfer-Pricing Rule Is Opportunity Cost

question 11

Essay

One element of the general transfer-pricing rule is opportunity cost. Briefly define the term "opportunity cost" and then explain how it is computed for (1) companies that have excess capacity and (2) companies that have no excess capacity.

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Definitions:

Home Currency Approach

A method of evaluating foreign investments where the returns are converted and analyzed in the investor's domestic currency.

Foreign Currency Approach

A method of accounting or analysis that deals with the effects of exchange rate changes on financial transactions and statements in foreign currencies.

Cash Flow

Cash flow refers to the net amount of cash being transferred in and out of a business, indicating its financial health.

Net Present Value

A method used in capital budgeting to assess the profitability of an investment, by discounting future cash flows to their present value and subtracting the initial investment cost.