Dave Macky, CFO of a pharmaceutical manufacturer, New Life Pharma, Inc., was app

Question

Dave Macky, CFO of a pharmaceutical manufacturer, New Life Pharma, Inc., was approached by a Japanese customer, Okyeo with a proposal to pay cash (in yen) for its typical orders of ¥22,500,000 if it were given a 5% discount. Okyeo's current terms are 60 days with no discounts. Using the following quotes and estimated cost of capital for Okyeo, Macky will compare the proposal with covering yen payments with forward contracts. How much in U.S. dollars will New Life Pharam receive with the discount and with no discount but fully covered with a forward contract?

Explanation / Answer

U.S dollarr received with discount =95%of ¥22,500,000/112.3

$=190,338

No discount but cvered with forward ¥22,500,000/111

=$202702

but interest on 190,338 for two month should be deducted from above to compare with no discount

interest =190,338*9.2%*60/365

=2878

so net amount $202702-2878

=$199,824

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