Question

Use the information below to answer the following questions.

CURRENCY	NUMBER OF FOREIGN CURRENCY UNITS PER U.S DOLLAR
Euro	1.25
Kwacha	10.00

i. Assume the firm can produce a liter of orange juice in the U.S. and ship it to Spain for $2.75. If the firm wants a 60% markup on the product, what should the juice sell for in Spain?

ii. Now the firm begins producing the orange juice in Spain. The product costs 3.50 euros to produce and ship to Zambia, where it can be sold for 20 Kwacha. What is the dollar profit on the sale?

b) What is the present value of K800 to be received at the end of 8 years, assuming an interest rate of 20 percent, compounded quarterly?

c) What annual interest rate would you need in order to have an ordinary annuity of K7,500 per year accumulate to K279,600 in 15 years?

Answer 1

CURRENCY	NUMBER OF FOREIGN CURRENCY UNITS PER U.S DOLLAR
Euro	1.25
Kwacha	10.00

i. Assume the firm can produce a liter of orange juice in the U.S. and ship it to Spain for $2.75. If the firm wants a 60% markup on the product, what should the juice sell for in Spain?

Production cost in US = $ 2.75

Add markup of 60%= $ 1.65

Total sales value = $ 4.4

Exchnage rate to spain = $ 1 / Euro 1.25

so selling price in spain = $ 4.4 * 1.25 = Euro 5.5

ii. Now the firm begins producing the orange juice in Spain. The product costs 3.50 euros to produce and ship to Zambia, where it can be sold for 20 Kwacha. What is the dollar profit on the sale?

The product cost in Zambia = Kwacha 28

for finding this firs we convert the the product cost from Euro to Doller and after we convert it to Kwacha

For that $ 1 = Euro 1.25 = Kwacha 10

Here the production cost is Euro 3.50, so conver it to Doller  

cost of production in Doller = total amt in Euro / Euro value per Doller = Euro 3.50 / Euro 1.25 = $ 2.8

$ 1 = Kwacha 10, so

cost of production in Kwacha = $ 2.8 * Kwacha 10 = Kwacha 28

Where it can be sold Kwacha 20, so the profit = 20 - 28 = Kwacha - 8

b) What is the present value of K800 to be received at the end of 8 years, assuming an interest rate of 20 percent, compounded quarterly?

First we convert K800 to Doller = K800 / K10 = $ 80

PV of Future value = FV * (1/1+R)n

FV = Future value = $ 80

R = 20 / 4= 5% (In the qustion they said that interest should be compounded quarterly, thats why we divide 20%by4)

n = 8 * 4 = 32

PV = 80 * (1 / 1 + 0.05) 32

PV =  80 * ( 1 / 1.05)32

PV = 80 * 0.2097

PV = $ 16.776

c) What annual interest rate would you need in order to have an ordinary annuity of K7,500 per year accumulate to K279,600 in 15 years?

For this the value of K279600 is future value,

FV = (ordinary annuity / R) * ((1 + R )n - 1)

or

FV = Ordinary annuity * (1 + R ) 15 Grand Total*

We use calculator for find grand total that is GT fuction of calculator

K 279600 = 7500 / * ( 1 + R )15 Grand Total

(1+R)15 = 279600 / 7500 = 37.28

cosider the Future Value of a 1 Annuity Table (Ordinary Annuity) of 15 year row and match the 37.28

Here I gave the period 15 row of Future Value of a 1 Annuity Table (Ordinary Annuity)

interest rate

1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 14% 16%

period 15 16.097 17.293 18.599 20.024 21.579 23.276 25.129 27.152 29.361 31.772 34.405 37.280 43.842 51.660

I gave a under line in the table

Interest rate = 12%