A New Project Is Projected to Yield $2

question 15

Multiple Choice

A new project is projected to yield $2.5 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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