FIN$1200$ International Trade Finance

Case Study #$4$ Week $10$

Case Study #$4$

Assigned: Week $10$

Due: Week $13$

Customer:

Customer is in Sweden and wants to buy $100$ units of your widget. They want to buy these

widgets on Open Terms at $90$ days, but are willing to pay on net $30$ for a $1\%$ discount. The value

of each widget is $$5,000.$ It will take $2$ weeks to ship the product to Sweden from Canada$$s

manufacturing plant.

Operations:

It takes $5$ weeks to build the widget if you work with supplier B$.$ If you opt to go for cheaper

components and buy from supplier C it will take you $6$ weeks. Production costs $$150$ per week

for each widget built.

Suppliers:

In order to build these widgets you have two suppliers who work with you. Supplier A sells you

a critical component for $$500$ per component. They want cash in advance, but are willing to

offer you open terms on net $60$ if you pay an additional $2\%$ for the total cost of the order. They

are located in Canada, and take $4$ weeks to ship to you.

Supplier B sells you a non$-$critical component and is located in USA. They are willing to sell to

you on open terms net $90$ and charge $$600$ per component. They will take $2$ weeks to ship to

you.

As an alternative to Supplier B you could choose to work with the Chinese supplier. They will

sell to you components at $$475$ per component, but require payment by an LC$.$ They will take $6$

weeks to ship to you.

Financial information:

$$ You can borrow at $10\%$ interest rate on your line of credit

$$ FX forwards are issued at $1\mathrm{.}5\%$ of the contract value

$$ Issuing an LC costs $1\%$

$$ Confirming an LC costs $3\%$

$$ ARI costs $0\mathrm{.}50\%$ for Sweden, $0\mathrm{.}75\%$ for Italy

Equipment:

In order to produce these widgets you will need some new equipment.

You can buy this equipment for $$200,000$ and can pay cash up$-$front, or finance it over $5-$years

with interest at $7\%.$ The payments will be straight$-$line payments with the full value being paid

out by the end of year $5.$

You can also lease the equipment $$ the residual value will be $$140,000$ after $5-$years. The lease

rates are at $12\%,$ and are paid straight$-$line.