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MGMT 6367

Assignment 4 (Solution)

Assignment Problems (46 points in total):

1. Although most organizations may make the location decisions infrequently, there are

some organizations that make the decision quite regularly and often. Please cite one

example that makes location decisions frequently and provide one or two sentences in

support of the choice. (4 points)

Any appropriate example such as company-owned gas stations and fast-food chains.

Grade breakdown: 2 pts for the example itself and 2 pts for the reasoning.

2. A small manufacturing facility is being planned that will feed parts to three heavy

manufacturing facilities. The locations of the current plants with their coordinates and

volume requirements are given in the following table:

Please use the centroid method to determine the best location for this new facility. For

full credit, please provide at least one step of calculation for each of the two map

coordinates of the centroid. (8 points)

Grade breakdown: For each coordinate, 2 pts for the step of calculation and 2 pts for

the correct answer.

Plant location Map coordinates (x, y) Volume (Parts per year)

Peoria 300, 320 4,000 Decatur 350, 450 5,000

Joliet 470, 180 3,000

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3. Daniel Tracy, owner of Martin Manufacturing, must expand by building a new factory.

The search for a location for this factory has been narrowed to three sites: A, B, and C.

The following table shows the results thus far obtained by Tracy by using the factor-

rating method to analyze the problem. The scale used for each factor scoring is 1

through 5, with 5 as the best.

Which site should Tracy choose? For each site, please provide the overall rating and at

least one step of calculation for full credit. (10 points)

Note that the following method is appropriate in this case since the factors are rated

based on the same 1-5 scale.

The overall rating of Site A = 5*10 + 2*8 + 3*8 + 5*7 + 2*6 = 137

The overall rating of Site B = 4*10 + 3*8 + 4*8 + 3*7 + 3*6 = 135

The overall rating of Site C = 4*10 + 4*8 + 3*8 + 4*7 + 3*6 = 142

Site C has the highest overall rating in this case.

Or we can first calculate the relative importance weights of the 5 factors and then

compute the overall ratings of the sites. The relative importance weight of “Qual ity of

labor” = 10/(10+8+8+7+6) = 10/39, for example. And the relative importance weight of

“Construction cost” = 8/(10+8+8+7+6) = 8/39.

Grade breakdown: For each overall rating, 2 pst for the step of calculation and 1 pt for

the correct answer; 1 pt for the correct selection of the factory site.

4. Suppose the direct quote of the nominal exchange rate between U.S. dollar and Euro

increases by 2% from the U.S. perspective. The inflation rate in the U.S. is 5% and the

inflation rate in France is 2%.

a. What is the percentage change in the real exchange rate between US dollar and

Euro? Please provide the formula, at least one step of calculation, and the correct

answer for full credit. (6 points)

Factor Weight A B C

Quality of labor 10 5 4 4 Construction cost 8 2 3 4 Transportation cost 8 3 4 3 Proximity to markets 7 5 3 4 Taxes 6 2 3 3

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Grade breakdown: 2 pts for the formula, 2 pts for th step of calculation, and 2 pts for

the correct answer.

b. Is this a currency depreciation or appreciation in the U.S.? Why? (4 points)

This is currency appreciation since it now takes less US dollars to buy one Euro.

Grade breakdown: 2 pts for the appreciation/depreciation answer and 2 pts for the

reasoning.

5. Suppose a U.S. company contracted to sell 10,000 units of a product to a French

company at a unit sales price of €4 with delivery in 90 days and payment due on delivery.

The nominal exchange rate between U.S. dollar and Euro is 1.4 $/€ on the contract

signing date. The U.S. company has the option of using a 90-day forward contract to

protect itself against an adverse change in the exchange rate. Based on the assessment

of the financial markets, the 90-day forward contract can be purchased at a discount of

2%.

a. Suppose the U.S. company has no intention of using the forward contract in this

transaction and the nominal exchange rate between U.S. dollar and Euro decreases

to 1.2 $/€ on the delivery date. Then how much will the U.S. company receive in

terms of U.S. dollar on the delivery date? Please provide at least one step of

calculation for full credit. (6 points)

Amount of payment to receive in Euro = €4 * 10,000 = €40,000

Amount of payment to receive in US dollar = €40,000 * 1.2 $/€ = $48,000

Grade breakdown: 2 pts for the one step of calculation provided, 2pts for the correct

exchange rate used, and 2 pts for the correct answer.

b. If the U.S. company chooses to use the 90-day forward contract to protect against

the foreign exchange risk, how much will the U.S. company receive in terms of U.S.

dollar on the delivery date? Please provide the forward rate and at least one step of

calculation for full credit. (8 points)

We first need to calculate the forward rate based on the spot rate of 1.4$/€ on the

contract signing date.

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Amount of payment to receive in US dollar = = €40,000 * 1.393$/€ = $ 55,720

Grade breakdown: 2 pts for the correct forward rate, 2 pts for one step of

calculation, 2 pts for the correct dollar amount, and 2 pts of extra credit.