Mark Sexton and Todd Story, the owners of S&S Air, have been in discussions with an aircraft

Question:

Mark Sexton and Todd Story, the owners of S&S Air, have been in discussions with an aircraft dealer in Europe about selling the company's Eagle airplane. The Eagle sells for $98,000 and has a variable cost of $81,000 per airplane. Amalie Diefenbaker, the dealer, wants to add the Eagle to her current retail line. Amalie has told Mark and Todd that she feels she will be able to sell 15 airplanes per month in Europe. All sales will be made in euros, and Amalie will pay the company €75,384 for each plane. Amalie proposes that she order 15 aircraft today for the first month's sales. She will pay for all 15 aircraft in 90 days. This order and payment schedule will continue each month.

1. What are the pros and cons of the international sales? What additional risks will the company face?

2. What happens to the company's profits if the dollar strengthens? What if the dollar weakens?

3. Ignoring taxes, what are S&S Air's projected gains or losses from this proposed arrangement at the current exchange rate of $1.30/€? What happens to profits if the exchange rate changes to $1.37/€? At what exchange rate will the company break even?

4. How could the company hedge its exchange rate risk? What are the implications of this approach?

5. Taking all factors into account, should the company pursue the international sales deal further? Why or why not?

Dealer
A dealer in the securities market is an individual or firm who stands ready and willing to buy a security for its own account (at its bid price) or sell from its own account (at its ask price). A dealer seeks to profit from the spread between the... Exchange Rate
The value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars...