Suppose, the Cost of Production of a Widget in Mexico

question 4

Multiple Choice

Suppose, the cost of production of a widget in Mexico is 5 pesos.Assume that initially the exchange rate between the peso and the dollar is 2 pesos per dollar.Later, the exchange rate changes to 2.5 pesos per dollar.In the initial situation, a widget sold in the U.S.would be priced at_____; after the change in the exchange rate, the widget would be priced at______ .

• A)$2.50; $2.00
• B)$2.50; $3.12
• C)$0.50; $0.40
• D)$0.40; $0.50

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Definitions:

Profitability Index

A capital budgeting tool that measures the ratio between the present value of future cash flows from an investment and the initial investment cost.

After-tax Cash Flows

The net amount of cash that remains after all tax liabilities have been deducted from a company's revenues.

Required Return

The lowest yearly percentage gain from an investment required to attract individuals or businesses to invest in a specific security or project.

Profitability Index

A calculation used in capital budgeting to determine the relative profitability of an investment, computed as the present value of future cash flows divided by the initial investment cost.