Assume the company’s sales of trapdoors and cash flows in China is projected as follows for...

Assume the company’s sales of trapdoors and cash flows in China is projected as follows for the
coming year. The spot rate is $0.13/¥.

	Units	Price	Total
Sales	10000	¥1,750.00	¥17,500,000.00
Variable costs - Imported from US at $50	10000	¥384.62	¥3,846,153.85
Variable costs - Local component	10000	¥500.00	¥5,000,000.00
Fixed Costs			¥350,000.00
Depreciation			¥400,000.00
Profits before taxes			¥7,903,846.15
Taxes 35%%			¥2,766,346.15
Net profit after taxes			¥5,137,500.00
Add back depreciation			¥400,000.00
Cash Flows			¥5,537,500.00
Net profit in US dollars	Spot rate	$0.13	$719,875.00

Assume the yuan is expected to depreciate to $0.10 because of high inflation locally. The price of the trapdoor and the local component of variable costs is expected to increase by 8% per unit. Export sales is expected to decrease to 9,000 units because of the increase in prices. The fixed cost is expected to remain the same. Assuming the new exchange rate is expected to be permanent, what is the economic exposure? Use five years to find the Present value of the change in cash flows at a cost of capital of 16%.

Expert Solution

Using five year the present value of the change in cash flow at a cost of capital of 16 % is $863686.

Total discounted cash flow in old situation is $2357082

Total cash flow after change is $1493396.

Here we first find the present value of total cash flow in 5 years which is $2357082 and for discounting we used the formula

->cashflow/(1+cost of capital)^period.

ansd then we find the present value of total cash flow in 5 years with change elements like spot rate and variable cost.

is $1493396.

and then found the difference which came out to be is $863686.

Please refer to the attached file for step explanation and calculation along with formula and cell referred.

jeff jeffy answered 2 years ago

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