Question

A US MNC receives £100,000 per month from its UK subsidiary.It also incurs expenses of £80,000 per month. If the pound depreciates from $1.00/£ to $0.90/£ over the course of a month, the net impact on the firm is a

pound cash flow worth $1,000 more.

pound cash flow worth $2,000 less.

pound cash flow worth $2,000 more.

pound cash flow worth $1,000 less.

Answer 1

Solution:

As per the information given in the question we have:

1. Receipt £ 100,000
2. Less : Expense              £   80,000
3. Net Receipt                   £   20,000

Exchange rate at the start of the month:

1 £ = $ 1.00

Thus on conversion of the net amount receivable into USD we have

£ 20,000 * $ 1

= $ 20,000

Exchange rate at the end of the month:

1 £ = $ 0.90

Thus on conversion of the net amount receivable into USD we have

= £ 20,000 * $ 0.90

= $ 18,000

Thus the net impact on the firm is

= Conversion value at the end of the month - Conversion value at the start of the month

= $ 18,000 - $ 20,000

= - $ 2,000

= Pound cash flow worth $ 2,000 less

Thus the solution is Option 2 = Pound cash flow worth $ 2,000 less