A New Project Is Projected to Yield $Million Annually in After-Tax

question 5

Multiple Choice

A new project is projected to yield $million annually in after-tax profit, based on a local corporate profit tax rate of 40%. However, this profit figure depends on the use of a transfer price of $30 per unit on a component bought from the parent. If the project requires 100,000 units of this component annually, the impact on project profitability and on parent profitability of a boost in the transfer price to $35 will be _______ and _______, respectively. The parent's marginal tax rate is 34% and the incremental tax on subsidiary remittances to the parent is -3%.

• A) -$500,000, +$500,000
• B) -$300,000, +$330,000
• C) -$300,000, +$321,000
• D) +$500,000, -$500,000

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