Answered: SamReap Bhd, a listed company,…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Transcribed Image Text:SamReap Bhd, a listed company, manufactures eco-friendly fridges for industrial and domestic refrigeration. The company started producing and selling its own brand of fridges a few years ago. To minimize the energy consumption, a fridge requires specialised electronic parts to be fitted within the motor. The required electronic parts are not available locally. The company imports the electronic parts from the US for the production of its fridges. SamReap Bhd has contracted to purchase 8,000 electronic parts at a unit price of $20. The US supplier has granted four months credit before payment is due. SamReap Bhd currently has no surplus cash, but can borrow for short term at 3% above bank base rate or invest for short term at 1% below bank base rate in either Malaysia or US. Current exchange rates RM/US$ Spot 3.2677 – 3.2682 I month forward 2.5 – 1.5 premium 4 months forward 4 - 4.5 discount The premium/discount relates to the Ringgit Malaysia Current bank base rate |MALAYSIA 6.60% US 3.30% REQUIRED: (a) Using forward contract and leading the payment, calculate the cost to pay the US payment and recommend which method the company should adopt. Assume that interest rates will not change during the four months. (b) If the US supplier were to offer a 4% discount on the purchase price for payment within one month, evaluate whether you would alter your recommendation in (a) above.

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