A US based computer manufacture produces and sells laptops in South America thro
ID: 2803921 • Letter: A
Question
A US based computer manufacture produces and sells laptops in South America through two manufacturing facilities: one in Argentina and the other in Brazil. The following applies:
Argentina
Brazil
Investment price
200 million US$
200 million US$
Cost per Laptop
900 pesos
600 reals
Price per Laptop
1200 pesos
800 reals
Projected Annual Earnings
150 million pesos
100 million reals
Exchange Rate
Pesos 3 / US$
Reals 2/US$
If Brazil real depreciates 20% against the US$, what is the return on investment in Brazil, if other things remain the same?
15%
20%
25%
30%
Argentina
Brazil
Investment price
200 million US$
200 million US$
Cost per Laptop
900 pesos
600 reals
Price per Laptop
1200 pesos
800 reals
Projected Annual Earnings
150 million pesos
100 million reals
Exchange Rate
Pesos 3 / US$
Reals 2/US$
Explanation / Answer
Projected Annual Earnings in Reals = 100 million reals
Current Exchange rate for Real is 1US$ = 2 Reals
It is given that Real depreciates 20% against US$
Therefore, new exchange rate is
1 US$ = 2 Reals * 1.20
1 US$ = 2.4 Reals
Projected Annual Earnings in US$ = 100 Million Reals / 2.4 Reals
= US$41.67 Million
Return on Investment = (41.67 / 200) * 100
= 0.20835 * 100
= 20.835%
The answer is nearer to 20%.
If there was no change in exchange rate, then the rate would be 1 US$ = 2 Reals
Earnings would be = (100 / 2)
= US$ 50 Million
Return would be = (50 / 200) * 100
= 25%
But because of depreciation in the exchange rate, return on investment has reduced to 20%.
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