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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Communication

 Global Electronics Inc. invested $1,000,000 to build a plant in a foreign country. The labor and materials used in production are purchased locally. The plant expansion was estimated to produce an internal rate of return of 20% in U.S. dollar terms. Due to a currency crisis, the currency exchange rate between the local currency and the U.S. dollar doubled from two local units per U.S. dollar to four local units per U.S. dollar.

 Write a brief memo to the chief financial officer, Tom Greene, explaining the impact the currency exchange rate change would have on the project’s internal rate of return if (1) the plant produced and sold all product in the local economy only and (2) the plant produced all product locally and exported all product to the United States for sale.

To determine

To Write: A memo to the CFO of Company G.

Explanation

                                                                 MEMO

From: XYZ

To: The CFO, Company G

Dt: 15th January, 2018

Sub: Impact of currency exchange rate on internal rate of return.

(1) By reviewing the impact of the currency exchange rate on the project’s internal rate of return, it has been found out that, there would be a significant change of currency exchange rate on the project’s internal rate of return, based on the location where the products were actually sold. If the product is sold in the local market, then the internal rate of return will decrease as all the cash flows (labor & material expenses, and sales) incurred in the local currency; because the net cash inflows in local market will be less in U...

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