Exchange Rates, Investment Decisions

Exchange Rates, Investment Decisions

Subject: Management
Imagine a small consulting firm located in Western Ontario in Canada, very close to the Canada-US border. The company has a number of clients in the United States and has been considering establishing a small subsidiary. The president believes that an office in the United States sould be profitable, but the company has a policy of allocating no more thatn 25 percent of its expansion budget to one company. This policy is based on the belief that expansion should not be tied to only one firm. The company has an expansion budget of approximately Can$500,000. The firm has determined that the needed investment in the U.S. subsidiary is approximately US$150,000.

1. If Can$1 is worth US$0.80, will the Canadian company invest in the United States? If the value changes to US$0.85, will the company invest?
2. At what exchange rate will the company’s decision change from "invest" to "don’t invest"?
3. At today’s exchange rate, what decision would the company make? [include which day you considered ‘today’, and the relevant exchange rate]

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