Write a brief memo to the chief financial officer, Tom Greene, explaining the impact that the currency exchange rate change would have on the project’s internal rate of return if (1) the plant produced and sold product in the local economy only, and (2) the plant produced all product locally and exported all product to the United States for sale.
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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 pro-duce an
Write a brief memo to the chief financial officer, Tom Greene, explaining the impact that the currency exchange rate change would have on the project’s internal rate of return if (1) the plant produced and sold product in the local economy only, and (2) the plant produced all product locally and exported all product to the United States for sale.
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- The CMOS Electronics Company is considering a capital investment of 50,000,000 pesos in an assembly plant located in a foreign country. Currency is expressed in pesos, and the exchange rate is now 100 pesos per U.S. dollar. The country has followed a policy of devaluing its currency against the dollar by 10% per year to build up its export business to the United States. This means that each year the number of pesos exchanged for a dollar increases by 10% (fe = 10%), so in two years (1.10)2(100) = 121 pesos would be traded for one dollar. Labor is quite inexpensive in this country, so management of CMOS Electronics feels that the proposed plant will produce the following rather attractive ATCF, stated in pesos: If CMOS Electronics requires a 15% IRR per year, after taxes, in U.S. dollars (ius) on its foreign investments, should this assembly plant be approved? Assume that there are no unusual risks of nationalization of foreigninvestments in this country.ABC Inc. is a US company that is considering moving its manufacturing facility to Mexico. The Mexican subsidiary manufactures toys for kids which will be sold to Mexican households in big cities. The cost to purchase and equip the facility is 20,000,000 Mexican pesos. The company's production, administrative and sales department have supplied the estimates of earnings and annual changes in net working capital, interest rates in Mexico and the US, the current peso/dollar exchange rate as follows: year US interest rate Mexico's interest rate Pesos per dollar Initial investment EBIT Change in net working capital Capital expenditure Unit: Mexican Peso 0 18 -20,000,000 1 2 3 1.50% 1.50% 1.50% 7.25% 7.25% 7.25% 100,000 140,000 948,000 250,000 40,000 40,000 0 0 Perform an NPV analysis to determine whether this is a good investment, under the following assumptions: a) The peso/dollar exchange rate is currently 18pesos/$, and the peso is expected to appreciate/depreciate at a rate justified by…IBM purchased computer chips from NEC, a Japanese electronics concern, and was billed 1500 million payable in three months. Currently, the spot exchange rate is ¥110/$ and the three-month forward rate is ¥100/S. The three-month money market interest rate is 12 percent per annum in the United States and 9 percent per annum in Japan. The management of IBM decided to use a money market hedge to deal with this yen account payable a. Explain the process of a money market hedge and compute the dollar cost of meeting the yen obligation b. Conduct a cash flow analysis of the money market hedge
- Riverside Clippers Corp believes that the U.S. dollar may weaken in the coming months against the New Taiwanese Dollar and does not want to face any currency risk. Assume that Riverside Clippers Corp can enter into a forward contract today to purchase 175 NTD for $5.35. Should Riverside Clippers Corp manufacture the 800,000 garden tools in the Maryland facility or purchase them from the Taiwan supplier? Explain.A Canadian company has a division in Mexico. The Canadian company needs to borrow money for its Mexican division and has the choice of borrowing in Mexico or Canada. The effective annual interest rate in Canada is 6 percent and the interest rate in Mexico is 10 percent. The current exchange rate is 15 Mexican pesos per Canadian dollar. If you believe that the Canadian dollar will depreciate 10 percent against the Mexican peso over the next 6 months, where should the company borrow? For simplicity, assume that the company wants to borrow $100 dollars for 6 months.IBM purchased computer chips from Toshiba, a Japanese electronics concern, and was billed ¥250 million payable in three months. Currently, the spot exchange rate is ¥105/$ and the three-month forward rate is ¥100/$. The three-month money market interest rate is 8% per year in the U.S. and 7% per year in Japan. The management of IBM decided to use the money market hedge to deal with this yen account payable. a. Explain the process of a money market hedge from this deal and compute the dollar cost of meeting the yen obligation. b. Conduct the cash flow analysis of the money market hedge.
- Harmony is a South African mining company that exports 24 ounces of gold to the US. Gold is priced in US dollars but Harmony's workers are paid in rand (the currency of South Africa). The current price of gold is 1,798 dollars per ounce. The current exchange rate is 18.48 rand (R) per $1. Harmony's current mining costs are R14,000 per ounce. Expected one-year inflation rates are 2 in the U.S. and 5 in South Africa (in%). If the exchange rate in one year is consistent with PPP, what is the gold price that would maintain Harmony's profits constant in real terms? Enter your answer with no decimals (so enter 9.8 as 10)A Northwest party products manufacturer has production facilities in Spokane, WA and Bangladesh. Both facilities have capacities of 1 million units each per year. The cost of production and distribution of party supplies from Spokane is $1/unit. The cost of production and distribution from Bangladesh is 60 Taka/unit. (Current exchange rate is $1=85 Taka). Over the next two years the exchange rate is expected to strengthen by 10% with a 0.5 probability and weaken by 10% with a probability of 0.5. The expected demand this year is about 1.8 million units. Over the next two years the demand is expected to increase by 10% with a probability of 0.5 and decrease by 5% with a probability of 0.5. If demand is more than the capacity of the two plants then the remaining supplies are acquired from a competitor for $2/unit. What is the NPV of total cost with the current manufacturing setup? The company is considering increasing the capacity of the Bangladesh plant by 500,000 units at a fixed…The treasurer of a major U.S. firm has $22 million to invest for three months. The interest rate in the United States is .22 percent per month. The interest rate in Great Britain is .27 percent per month. The spot exchange rate is £.622, and the three-month forward rate is £.624. Ignore transaction costs. What would be the value of the investment in three months if the money is invested in the U.S. or if it is invested in Great Britain? (Do not round intermediate calculations and enter your answers in dollars, not in millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.) U.S. Great Britain
- Your Boston-headquartered manufacturing company, Wruck Enterprises, obtained a 50-million-peso loan from a Mexico City bank last month to fund the expansion of your Monterrey, Mexico, plant. The exchange rate was 10 U.S. cents per peso when you took out the loan, but since then the exchange rate has dropped to 9 U.S. cents per peso. Has Wruck Enterprises made a gain or a loss due to the exchange rate change, and how much? Note that your shareholders live in the United States.Suppose that Retrojo Inc. is a U.S. based MNC that will need to purchase F$1.10 million (Fijian dollars, F$) worth of imports from Fiji in 90 days. Currently, the spot rate for the Fijian dollar is $0.53 per F$. If Retrojo were to exchange U.S. dollars for the required F$1,100,000.00 Fijian dollars, it would need $ (U.S. dollars). If Retrojo waits 90 days to make this exchange (perhaps due to insufficient funds on hand), and the Fijian dollar appreciates to $0.64 during those 90- days, then Retrojo would need $ (U.S. dollars). Thus, if Retrojo believes that the Fijian dollar will appreciate, it can its exposure to such exchange rate risk by locking in the original exchange rate through the use of a forward contract.A British firm will receive $1 million from a U.S. customer in three months. The firm is considering two strategies to eliminate its foreign exchange exposure. The first strategy is to pledge the $1 million as collateral for a three month loan from a U.S. bank at 4 percent interest. The U.K. firm will then convert the proceeds of the loan to pounds at the spot rate. When the loan is due, the firm will pay the $1 million balance due by handing its U.S. receivable over to the bank. This strategy allows the U.K. firm to “monetize” its receivable immediately. The spot exchange rate is 0.6550 pounds per dollar. The second strategy is to enter a forward contract at an exchange rate of 0.6450 pounds per dollar. This ensures that the U.K. firm will receive £645,000 in three months. If the firm wanted to monetize this payment immediately, it could take out a three-month loan from a U.K. bank at 8 percent, pledging the proceeds of the forward contract as collateral. Which of…