Corporate Finance - Assignment 03 Example | Topics and Well Written Essays - 1500 words

Corporate Finance - 03 - Assignment Example The study will be conducted for five days from 23rd December 2014 to 27th December 2014. The equipment is needed in January 2015. The estimated transportation cost is AED 5 million. The company intends to spend the remaining AED 50 million towards the equipment purchase. The equipment is quoted to cost  £ 860,000 and â‚ ¬ 1,090,000 in pounds and Euros respectively. The study of the currency movement will aid the purchase at a lower price. Therefore, this assignment presents a five-day exchange rate in a table format showing the value of AED 50 million, for each day, in both the currencies (Pounds and Euros). For each of the five days, the cost of the purchase and the impact of the decision are presented. Last, a report that provides justifications that the decision made is favourable to the company also is provided. For the purpose of purchasing the equipment, the currency used for the transaction is the Euros. The table 3 below shows the cost of the equipment in AED based on the exchange rates observations presented in table 1 above. The equipment is quoted to cost â‚ ¬ 1,090,000. Therefore, after incorporating the exchange rates, the costs are below. From the table 3 above, the company will spend (1,090,000/0.223548) = AED 4,875,910 to purchase the equipment on the first day. â‚ ¬1,090,000 is the price quoted in Euros. In order to determine the cost of purchasing the equipment on day 1, the quote price is divided by the exchange rate (AED/ £) on that day. Recapture that AED 50 million was allocated for the expenditure. Therefore, by making the decision to purchase the equipment, the company will save (50,000,000 – 4,875,910) = AED 45,124,090 for the reason that the equipment will be worth less than the planned cost (XE Live Exchange Rates, 2014). The company’s capital expenditure will be significantly reduced, thereby increasing its financial flexibility (ability to pursue other profitable investments). The