# Some questions! Essay Example

This is an economic theory that is concerned with adjustment of amounts that would be required between country’s exchange rates in order to ensure that exchange is equivalent to the purchasing power of each currency. It is calculated by the formula;

S=p1/p2 where, s is the rate of currency exchange between currency 1 and 2

P1 is the currency 1 cost and p2 is currency 2 cost.

 Actual exchange rate (Domestic/foreign) Domestic prices (currency 1) Foreign prices (currency 2) CPP (currency 1/currency 2) 100.00/100.00 = 0 106.04/106.70 = 0.99 115.28/110.75 = 1.04 123.55/114.41 = 1.08 132.70/120.68 = 1.20 139.55/127.34 = 1.02 150.40/137.36 = 1.02 158.96/137.36 = 1.16 169.15/144.88 = 1.17 178.01/149.88 = 1.19 188.55/157.72 = 1.20 200.71/164.20 = 1.22 210.85/169.58 = 1.24 222.29/175.83 = 1.26 235.77/182.33 = 1.30 251.21/191.61 = 1.30 264.02/200.58 = 1.32 280.99/209.35 = 1.34 295.15/218.99 = 1.35 313.24/226.37 = 1.40 231.33/235.85 = 1.08 348.15/254.77 = 1.40

c) Percent deviation

Percent deviation `is calculated by subtracting the observed value from the accepted value and then dividing the answer by the observed value. In this case, the observed value is the actual exchange rate and the accepted value is the CPP.

 Actual exchange rate Percent deviation=( CPP-actual rate)/actual * 100 0 (0-2.8397)/2.8397 *100 =0% (0.99-2.6871)/2.6871*100 =-169% (1.04-1.9171)/1.9171*100 =-45.75% (1.08-2.3774)/2.3774 = -55% (1.02-1.7725)/1.7725=42.4% (1.02-3.2643)/3.2643 = -69% (1.02-1.8685)/1.8685 = -45 % (1.16-4.0757)/4.0757 = -72% (1.17-3.5116)/3. 5116= -42.3% (1.19-2.0286)/2.0286 =-41.3% (1.20-3.4712)/3.4712 = -65.4% (1.22-3.3230)/3.3230 = -63% (1.24-4.0433)/4.0433 = -69% (1.26-1.7364)/1.7364 = -27% (1.30-2.9546)/2.9546 = -56% (1.30-3.1847)/3.1847 = -59% (1.32-1.6524)/1.6524 = -20% (1.34-4.2821)/4.2821 = -69% (1.35-3.9053)/3.9053 = -65% (1.40-2.3159)/2.3159 = -38% (1.08-3.5607)/3.5607 = -70% (1.40-3.9437)/3.9437 =-65%

d) Calculating profit.

A profit will be generated using the purchasing power parity. This will occur at a point where the currency is sold when it has been overvalued and bought when undervalued. Assuming that currency 1 deviates between 150 and 142.5. That is a 5% deviation. So if an individual buys that currency at 142.5 and sells it at 150 that will be a 5 % profit.

That is; (150-142.5)/142.5*100

Gain and Loss of Currency Translation

If the Australian currency appreciates, it will increase to 1.38 up from the previous 1.25. This means at a lower rate of 1.25, the currency used is the New Zealand dollar (NZD). With the currency appreciation, the New Zealand dollar is converted back to Australian dollar. The conversion is done as below ; using both monetary and non monetary methods.

 Amount in AUD at 1.25 Amount in NZD Amount in AUD at 1.38 Gain (loss) 1,250,000 1,000,000 Accounts receivable 4,500,000 2,000,000 Net fixed assets 13125000 10,500,000 14,490,000 1,365,000 Total assets 22500000 18,000,000 24,840,000 2,340,000 Accounts payable 2,000,000, 2,760,000 Long-term debt 2,000,000 2,760,000 Total liabilities 4,000,000 5,520,000 Shareholders’ equity 17500000 14,000,000 19,320,000 1,820,000 Share holders equity and ant total liabilities 22,500,000 18,000,000 24,840,000 2,340,000

This shows a currency gain.

Projected Cash Flows with Implementations

 Units (slabs) Unit price (AUD) Total ( AUD) Export sales ( slabs) Local sales ( slabs) 12740000 Total sales ( slabs) 18174783 Labor hours Raw materials 6086957.8 Total operating expenditure 26221962 Net operating income Overhead expenses Interest payments Depreciation Net profit before tax 15497325 Income tax Profit after tax Plus depreciation Net cash flow Net cash flow in AUD

Projected Cash Flows without Implementations;

 Units (slabs) Unit price (AUD) Total ( AUD) Export sales ( slabs) Local sales ( slabs) 10144928 Total sales ( slabs) 14492753 Labor hours Raw materials Total operating expenditure 26221962 Net operating income Overhead expenses Interest payments Depreciation Net profit before tax Income tax Profit after tax Plus depreciation Net cash flow Net cash flow in AUD