164490535 Assignment 4 Solution

MGMT 6367 Assignment 4 (Solution) Assignment Problems (46 points in total): 1. Although most organizations may make the location decisions infrequently, there are some organizations that make the decision quite regularly and often. Please cite one example that makes location decisions frequently and provide one or two sentences in support of the choice. (4 points) Any appropriate example such as company-owned gas stations and fast-food chains. Grade breakdown: 2 pts for the example itself and 2 pts for the reasoning.

2. A small manufacturing facility is being planned that will feed parts to three heavy manufacturing facilities. The locations of the current plants with their coordinates and volume requirements are given in the following table: Plant location Peoria Decatur Joliet

Map coordinates (x, y) 300, 320 350, 450 470, 180

Volume (Parts per year) 4,000 5,000 3,000

Please use the centroid method to determine the best location for this new facility. For full credit, please provide at least one step of calculation for each of the two map coordinates of the centroid. (8 points)

Grade breakdown: For each coordinate, 2 pts for the step of calculation and 2 pts for the correct answer.

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3. Daniel Tracy, owner of Martin Manufacturing, must expand by building a new factory. The search for a location for this factory has been narrowed to three sites: A, B, and C. The following table shows the results thus far obtained by Tracy by using the factorrating method to analyze the problem. The scale used for each factor scoring is 1 through 5, with 5 as the best. Factor Quality of labor Construction cost Transportation cost Proximity to markets Taxes

Weight 10 8 8 7 6

A 5 2 3 5 2

B 4 3 4 3 3

C 4 4 3 4 3

Which site should Tracy choose? For each site, please provide the overall rating and at least one step of calculation for full credit. (10 points) Note that the following method is appropriate in this case since the factors are rated based on the same 1-5 scale. The overall rating of Site A = 5*10 + 2*8 + 3*8 + 5*7 + 2*6 = 137 The overall rating of Site B = 4*10 + 3*8 + 4*8 + 3*7 + 3*6 = 135 The overall rating of Site C = 4*10 + 4*8 + 3*8 + 4*7 + 3*6 = 142 Site C has the highest overall rating in this case. Or we can first calculate the relative importance weights of the 5 factors and then compute the overall ratings of the sites. The relative importance weight of “Qual ity of labor” = 10/(10+8+8+7+6) = 10/39, for example. And the relative importance weight of “Construction cost” = 8/(10+8+8+7+6) = 8/39. Grade breakdown: For each overall rating, 2 pst for the step of calculation and 1 pt for the correct answer; 1 pt for the correct selection of the factory site.

4. Suppose the direct quote of the nominal exchange rate between U.S. dollar and Euro increases by 2% from the U.S. perspective. The inflation rate in the U.S. is 5% and the inflation rate in France is 2%. a. What is the percentage change in the real exchange rate between US dollar and Euro? Please provide the formula, at least one step of calculation, and the correct answer for full credit. (6 points) 2

Grade breakdown: 2 pts for the formula, 2 pts for th step of calculation, and 2 pts for the correct answer. b. Is this a currency depreciation or appreciation in the U.S.? Why? (4 points) This is currency appreciation since it now takes less US dollars to buy one Euro. Grade breakdown: 2 pts for the appreciation/depreciation answer and 2 pts for the reasoning.

5. Suppose a U.S. company contracted to sell 10,000 units of a product to a French company at a unit sales price of €4 with delivery in 90 days and payment due on delivery. The nominal exchange rate between U.S. dollar and Euro is 1.4 $/€ on the contract signing date. The U.S. company has the option of using a 90-day forward contract to protect itself against an adverse change in the exchange rate. Based on the assessment of the financial markets, the 90-day forward contract can be purchased at a discount of 2%. a. Suppose the U.S. company has no intention of using the forward contract in this transaction and the nominal exchange rate between U.S. dollar and Euro decreases to 1.2 $/€ on the delivery date. Then how much will the U.S. company receive in terms of U.S. dollar on the delivery date? Please provide at least one step of calculation for full credit. (6 points) Amount of payment to receive in Euro = €4 * 10,000 = €40,000 Amount of payment to receive in US dollar = €40,000 * 1.2 $/€ = $48,000 Grade breakdown: 2 pts for the one step of calculation provided, 2pts for the correct exchange rate used, and 2 pts for the correct answer. b. If the U.S. company chooses to use the 90-day forward contract to protect against the foreign exchange risk, how much will the U.S. company receive in terms of U.S. dollar on the delivery date? Please provide the forward rate and at least one step of calculation for full credit. (8 points)

We first need to calculate the forward rate based on the spot rate of 1.4$/€ on the contract signing date. 3

Amount of payment to receive in US dollar = = €40,000 * 1.393$/€ = $ 55,720

Grade breakdown: 2 pts for the correct forward rate, 2 pts for one step of calculation, 2 pts for the correct dollar amount, and 2 pts of extra credit.

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