Some questions! Essay Example

A) Purchasing Power Parity

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