Question 21.ss.3: Digital, Inc., an electronic games manufacturer, is planning...

Fundamentals of Corporate Finance

Digital, Inc., an electronic games manufacturer, is planning to purchase flash memory from one of two sources. Kyoto, Inc., quotes a price of ¥6,800 per gigabyte. The current exchange rate is ¥84.30/$. Another Japanese manufacturer offers to supply the same flash memory at a price of €58.46 per gigabyte. The spot rate available is ¥121.57/€. Which is the cheaper source of flash memory for Digital?

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Cost from Vendor 1:

\begin{matrix} \text{Flash memory price quote} &=& ¥6,800 \text{per gigabyte} \\ \text{Spot rate for U.S. dollar} &=& ¥84.30/\$ \\ \text{Cost to Digital in dollars} &=& \frac{¥6,800}{¥84.30/\$}=\$80.66 \text{per gigabyte} \end{matrix}

Cost from Vendor 2:

\begin{matrix} \text{Flash memory price quote} &=& €58.46 \text{per gigabyte} \\ \text{Spot rate for U.S. dollar} &=& ¥121.57/€ \end{matrix}

To compute the dollar cost, we need to compute the cross rate between the euro and the dollar.

\frac{¥121.57/€}{¥84.30/\$}= \$1.4421/€

\begin{matrix} \text{Cost to Digital in dollars} &=& €58.46 \times \$1.4421/€ \\ &=& \$84.31 \text{per gigabyte} \end{matrix}

The first vendor has the cheaper quote for Digital.

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