Krona Sales Prices and All Costs Rise; Volume Remains the Same. It is assumed here that all costs and prices increase in proportion to the krona devaluation, but unit volume remains the same. However, the operating cash flow in kronor does not rise to the same extent because depreciation, which is based on historical cost, remains at SKr 900,000. As a potential offset, interest payments also hold steady at SKr 300,000. Working through the numbers in Exhibit 11.9 gives us an operating cash flow of $891,000.
The $9,000 reduction in cash flow equals the decreased dollar value of the SKr 900,000 depreciation tax shield less the decreased dollar cost of paying the SKr 300,000 in interest. Before devaluation, the depreciation tax shield was worth (900,000 × 0.4)/4 dollars, or $90,000. After devaluation, the dollar value of the tax shield declines to (900,000 × 0.4)/5 dollars = $72,000, or a loss of $18,000 in cash flow. Similarly, the dollar cost of paying SKr 300,000 in interest declines by $15,000 to $60,000 (from $75,000). After tax, this decrease in interest expense equals $9,000. Adding the two figures (—$18,000 + $9,000) yields a net loss of $9,000 annually in operating cash flow. The net economic gain over the coming three years, relative to predevaluation expectations, is $78,150.
Year
Postdevaluation Cash Flow (1)
—
Predevaluation Cash Flow (2)
=
Change in Cash Flow (3)
X
15% Present Value Factor (4)
=
Present Value (5)
1
$891,000
$900,000
—$9,000
0.870
—$7,830
2
891,000
900,000
—9,000
0.756
—6,800
3
1,041,000*
900,000
+ 141,000
0.658
92,780
Net Gain
$78,150
*Includes a gain of $150,000 on loan repayment.
All of this gain in economic value comes from the gain on repayment of the krona loan.