Apple, whose global sales are generally dollar denominated, finds it has excess

Question

Apple, whose global sales are generally dollar denominated, finds it has excess cash of $155,000,000,000, which it can invest for up to three years. It has determined that its best options are either a three-year Euro-dollar ($) deposit paying 2.5% or a three-year Swiss Franc denominated deposit paying 1.35% since it expects the SF to appreciate 1.15% per annum against the dollar over the next three years. Using cash flow analysis determine the best currency option in which Apple should invest. Be sure to show your complete calculations of the annual return on each investment at the end of the three-year term. Assume that the annual interest amount is reinvested, i.e. compounds, at the same annual interest rate. Would your answer change if Apple revised its outlook for the SF to appreciate 1.25% per year? Show all calculations!!!

Explanation / Answer

Calculation of Three Year value of Euro Dollar Deposit:

Suppose Apple invest $100 in a Three Year Euro Dollar Deposite paying 2.5% Per Year.

Investment Value after 3 Years is =

So, a $100 Investment in Euro Dollar will be of $107.6890625 at the End of Three Years

So, an Investment of $155,000,000,000 will be = $155,000,000,000 x 107.6890625 / 100= $166,918,046,875

at the End of Three Year.

Second Option: Investment in Swiss Franc Deposite paying 1.35%:

Suppose $100 Invested in Swiss Franc for three Years at 1.35%:

Assumption: Current Exchange Rate is $1 for 1 Swiss Franc

So, Deposite of 100 will have a value of 104.104921037 at the End of three Years.

Exchange Rate of Franc and Dollar after 3 Years:

So, Dollar Value of Investment after 3 Years = 104.104921037 x 1.03489827087 = $107.73800277

So, an Investment of $155,000,000,000 will be = $155,000,000,000 x 107.73800277 / 100= $166,993,904,293

Net Difference = 166,993,904,293 - 166,918,046,875 = $75,857,418

So, Investment in Swiss Franc is Better.

B. If Swiss Franc appreciate by 1.25%Per Year:

So, Dollar Value of Investment after 3 Years = 104.104921037 x 1.03797070312 = $108.057858087

So, an Investment of $155,000,000,000 will be = $155,000,000,000 x 108.057858087 / 100= $167,489,680,034

Net Difference = 167,489,680,034 - 166,918,046,875 = $5716,33,159

So, Investment in Swiss Franc is Better.

Year Investment Interest Year End Value 1 100 2.5% 102.50 2 102.50 2.5% 105.0625 3 105.0625 2.5% 107.6890625

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