(a) Sun Ltd. in planning to import an equipment from Japan at a cost of 3,400 lakh yen. The company may avail loans at 18 per cent per annum with quarterly rests with which it can import the equipment. The company has also an offer from Osaka branch of an India based bank extending credit of 180 days at 2 per cent per annum against opening of an irrecoverable letter of credit.

Additional information:

Present exchange rate Rs.100 = 340 yen 180 day's forward rate Rs.100 = 345 yen

Commission charges for letter of credit at 2 per cent per 12 months.

Advise the company whether the offer from the foreign branch should be accepted.

Hint: on opening of letter of credit an importer has to make payment of following charges:

1) Commission or opening fees, which is normally payable in advance.

2) Interest, which is added to the amount of Letter of credit hence payable at the end.

3) Assume that company will have to borrow money in Indian rupees @18%p.a. compounded quarterly

to pay the advance commission.

Answer rating: 100% (QA)

To advise Sun Ltd on whether to accept the offer from the foreign branch we need to compare the tota... View the full answer