Exchange Transactions Tom Peatty, the purchasing agent of Blown Glass Company, has received a bid for a new special glassblowing machine manufactured in Denmark. The machine is priced at 5,765,000 Danish kroner.

The terms of sale require payment in kroner within 60 days of shipment. In a separate letter, the supplier indicates that if Blown Glass wishes to pay in dollars, the price is $1,100,000 and, again, payment must be made within 60 days of shipment. Tom contacts the international desk of the company’s bank and gets the following information.

1. The spot rate for kroner is 5.765 to $1.

2. The 60 day forward rate for kroner is 5.850 to $1.

3. The bank will charge 1 percent to change approximately

$1,000,000 to kroner and prepare a cashier’s check in kroner.

4. If the payment is in dollars, a regular company check can be used for the payment.

Required:

a. Prepare an analysis that identifies the factors that Tom should consider in choosing a method of payment. Recommend a method of payment and provide justification.

b. Assume that Tom chooses to pay in kroner. When should he purchase the kroner? Why?

c. At what amount should the machine be recorded? Explain how you determined the amount.