Measuring Economic Exposure. Using the following cost and revenue information shown for DeKalb, Inc., determine how the total cash flow in USD would be affected by three possible exchange rate scenarios for the New Zealand dollar (NZ$): (1) NZ$ = $.40, (2) NZ$ = $.65, and (3) NZ$ = $.80. (Assume U.S. sales will be unaffected by the exchange rate.) Assume that NZ$ earnings will be remitted to the U.S. parent at the end of the period. Ignore possible interest expenses but consider depreciation effect on cash and tax rates of 35% in US and 20% in New Zealand. Please also calculate the economic exposure of the firm (Hint: use Excel graphing techniques and find the slope of a best fit line).

Forecasted Net Cash Flows: DeKalb Inc.

(in millions of U.S. dollars and New Zealand dollars)

New Zealand U.S. Business Business Sales $4000 NZ$2000 Cost of Materials 2500 Operating Expenses 1500 Depreciation Expense 500 Cash Flow ?? 1000 800 600