IBM, whose global sales are generally dollar denominated, finds it has excess ca
ID: 2385572 • Letter: I
Question
IBM, whose global sales are generally dollar denominated, finds it has excess cash of$9,500,000,000, which it can invest for up to three years. It has determined that its best
options are either a three-year Euro-dollar ($) deposit paying 2.55% or a three-year yen
denominated deposit paying 1.55% since it expects the yen to appreciate 0.95% per
annum against the dollar over the next three years. Using cash flow analysis determine
the best currency option in which IBM should invest. Be sure to show your complete
calculations of the annual return on each investment at the end of the three-year term.
Assume that the annual interest amount is reinvested, i.e. compounds, at the same annual
interest rate. Would your answer change if IBM revised its outlook for the yen to
appreciate 1.25% per year? Show all calculations!!!
Explanation / Answer
Euro
Yen
Yen (if it increases interest by .95)
Yen (if it increases interest by 1.25 while)
Generally the euro is the best unless the yen increases interest by 1.25% before the second year.,
At the end of the 3 years the euro yields $10245439648.06 at 2.55%. The yen yields $9948632501.81 at 1.55%, $10230460937.5 at 2.5%, and $10320552544 at 2.8%. If that's what you were looking for.
Interest
Principal 2.55% total 9500000000 242250000 9742250000 9742250000 248427375 9990677375 9990677375 254762273.06 10245439648.06