Equipment Installations Ltd

Equipment Installations Ltd., (EIL) are a UK-based company who install robotic production line equipment for specialist industries. Strategically, the company sources from ROBOCO Inc. in the United States. Deliveries from the US can take from 6 to12 weeks depending upon available production capacity. EIL quote a 26-week lead time to include for the variable supply costs and to cover installation. EIL are never late on commissioning the equipment; 40% of the sales are to EURO zone countries who insist on Euro pricing. A typical installation selling for 1m would include $800,000 of equipment and 300,000 labour. With exchange rates of $1.6638/ and 1.1025/ the economics are as follows:

	Original currency	Exchange rate originally	Sterling equivalen
Sales	1,000,000	1.1025	907,029
Cost of sales
Equipment	$800,000	1.6638	480,827
Labour	300,000	1	300,000
Profit/(Loss)		13.9%	126,202

However, only six months later the deal is not viable as can be seen in the table below:

	Original currency	Exchange rate 6 months later	Sterling equivalent
Sales	1,000,000	1.214	823,723
Cost of sales
Equipment	$800,000	1.4896	537,057
Labour	300,000	1	300,000
Profit/(Loss)		(1.6%)	(13,334)

Tasks

1 Identify a strategy for each of the equipment and labour cost elements of the transaction that will mitigate the risk of loss.

2 What financial factors would you need to take into account in implementing these strategies?

3. How would you seek to overcome the problem of a variable delivery date from the US and hence an unknown exchange rate?