IAI Actuarial Core Principles · Business Economics · Balance of payments and exchange rates
A firm imports machinery priced at USD 50,000. The exchange rate moves from Rs 80 per USD to Rs 84 per USD. What is the change in the rupee cost of the machinery?
The rupee cost rises by Rs 2,00,000. The machinery costs Rs 40,00,000 at 80 per dollar and Rs 42,00,000 at 84 per dollar, so the rupee depreciation of Rs 4 per dollar on USD 50,000 raises the cost by that amount.
- ADecrease of Rs 2,00,000
- BIncrease of Rs 2,00,000Correct
- CIncrease of Rs 4,000
- DIncrease of Rs 4,00,000
- Decrease of Rs 4,000
Explanation
Old cost = 50,000 x 80 = Rs 40,00,000. New cost = 50,000 x 84 = Rs 42,00,000. The increase is Rs 2,00,000. Rs 4,000 ignores the quantity of dollars, and Rs 4,00,000 doubles the change.
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