MAR3047 2014/15

Formative study questions for Lecture 1

1. A profitable manufacturer of offshore equipment has a steady revenue of $1

million per month and steady operating expenses of $800,000 per month.
The company has decided to invest $1.5 million in new machinery that will
reduce operating expenses by $50,000 per month after it is installed. The
suppliers of the machinery have offered the following payment terms:
 10% on order in Month 1
 80% on installation of the machinery in Month 4
 10% two months after installation, as a guarantee

The company starts with a cash balance of +$100,000. What is the minimum
overdraught requirement needed by the company to facilitate this purchase
and what is the cash balance at the end of 6 months from the decision to
purchase the new machinery?

2. Explain why exchange rates are so important for most companies operating in
the marine production sector. Indicate whether a strengthening currency for a
business located outside the United States is a good thing or a bad thing in
relation to exports and why?