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Hi John,
In part c of Lammer it mentions that net $ imports are $4.2m/yr and to estimate the impact on the expected MV of Lammer if the $ strengthens by 3%Firstly, my approach to the examiner is slightly different. I did the annuity of 4.2, for 5 years at 11% and divided by the spot rate.
I then worked out the PV of 4.2 each year at 11%, and / by the exchange rate which I took the spot rate 1.9156 and / 1.03 each year…. I realise the examiner took 97% of the spot rate instead. I’m
Hoping it’s still correct the way I’ve done it. Nonetheless, my working is slightly different but I wanted to know if the methodology can still be followed?Secondly, the ‘market value of Lammer’ I didn’t understand what they meant. The net imports is a cost to Lammer, which if $ strengthens they will have to pay more? And so each year you can see in the answer that the difference to spot rate increases each year meaning the MV increases?
Or maybe I’m completely fumbled on this question.
Please helpThank you
For your first point, it seems as though what you have done will still get the marks.
As far as your second point is concerned, I think you have misread the answer. They will indeed have to pay more and the differences from spot in the answer are the extra they will have to pay.
As a result the PV of the cash flows will fall by 727,370 and therefore so will the market value of Lammer.
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