21.1. What are six factors that cause international transactions to differ from

Question

21.1. What are six factors that cause international transactions to differ from domestic transactions?

21.2. If Dell Studio laptop sells for $999 in Austin, Texas and £689 in London, what is the implied exchange rate between the U.S dollar and the euro?

21.3. A bank in India has offered a spot rate quote on Indian rupees (Rs) of Rs62.2905/$. The Indian rupee is quoted at a 30-day forward premium of 5.22 percent against the dollar. What is the 30-day forward quote?

10.2. Flowers unlimited is considering purchasing an additional delivery truck that will have a seven-year useful life. The new truck will cost $42,000. Cost savings with this truck are expected to be $12,800 for the first two years, $8,900 for the following two years, and $5,000 for the last three years of the truck’s useful life. What is the payback period for this project? What is the discounted payback period for this project with a discount rate of 10 percent?

10.3. What is the average accounting rate of return (ARR) on a piece of equipment that will cost $1.2 million and that will result in pretext cost savings of $380,000 for the first three years and then $280,000 for the following three years? Assume that the machinery will be depreciated to a salvage value of 0 over six years using the straight-line method and the company’s tax rate is 32 percent. If the acceptance decision is based on the project exceeding an ARR of 20 percent, should this machinery be purchased?

Explanation / Answer

Solution for question 1

Six factors that cause international transactions to differ from domestic transactions is mention below:

1. Volatile Exchange rate

2. Uncertain government policies

3. Lending and borrowing rate differ

4. Difference in legal and tax law

5. Deference in account policies

6. In certain language is also a factor that influence international transaction.

Solution For question 2

Sale price in Austin = $999

Sale price in London = £689

Exchange rate between Pound and dollar = $999 / 689

                                                                   = $1.4499 per pound

Exchange rate between Pound and dollar is $1.4499 per pound.

Solution For question 3

Spot Rate = Rs62.2905 / $

The Indian rupee is quoted at a 30-day forward premium of 5.22 percent against the dollar.

So 30 day forward exchange rate = Rs62.2905 × (1 + 5.22%)

                                                      = Rs65.5421

So 30 day forward exchange rate is Rs65.5421 / $

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