A US computer company has a wholly owned British subsidiary, AB computers that manufactures and sells computers in UK. AB imports microprocessors from INTEL which sell them for $512 per unit. The current exchange rate is $1.6/. AB computer hires British workers and sources all the other inputs locally. AB faces income tax rate 50% in UK. The company currently sells 50000 units of PC per year at a selling price of 1000 per unit. The unit variable cost is 650 which comprises 320 for the imported inputs and 330 for the locally sourced inputs. Each year the company incurs fixed cost of 4 million for rents and property taxes and depreciation allowances of 1 million.

Now, assume the pound sterling is going to depreciate from $1.60/ to $1.40/. What are the possible effects of this depreciation of the pound sterling on the projected dollar operating cash flows of AB computers considering the following 3 cases?

1. The company is not going to raise the pound sterling price because of stiff competition from a British competitor that manufacture similar products using locally sourced inputs. No variable change, except the price of the imported input.

2. The selling price (1143) as well as the price of the imported input changes, with no other changes.

3. All the variable change i.e. the selling price, the sales volume, and the prices of both locally sourced and imported inputs change following the pound depreciation. Assume that both the selling price and the price of locally sourced inputs increase at the rate of 8%, reflecting the underlying inflation rate in the UK. The expected sales are 40000 units per year.