Nestle is a multinational Fiji company that manufactures a variety of products. To conduct its manufacturing, they import certain ingredients from countries like Japan and South Korea.

The market for the manufactured goods are the U.S.A, Australia, Papua New Guinea, Canada and United Kingdom (U.K). However, the majority of sales is in the U.K where majority of our Fijian British Armies are based. Therefore, the company has already established a subsidiary in the U.K. It resells and distribute the products to different businesses. The quarterly net profit after tax generated by the subsidiary is 500,000. The exports to Canada and Australia are to other independent distributing companies that buys their products at wholesale prices from Nestle.

Nestle is also considering opening up of a business manufacture and to plant ingredients locally to eliminate the risks and costs associated with the current importing from countries like Japan and South Korea.

Nestle already has sufficient manufacturing space available and only has to import manufacturing equipment of 63,000,000 Yen from Japan. The installation of the machinery will be conducted by local Fiji company and will cost $1000,000.

Part A In your brief report to the Board: Provide the CEO important information that will assist him with his decision. Provide any relevant theory that is most applicable that will assist him in his understanding. Working and reference to be attached as an appendix. (2000-3000 words max). (10 marks)

1) information to assist him with determining the extent of exchange rate risk and the availability of funds to conduct the multinational transactions:

a forecast of the one year and two-year exchange rates for the $/ calculated based on purchasing power parity (PPP) and with the International Fisher Effect (IFE) with the following existing available information:

Current $/ spot exchange rate $1.3036/ Fijis expected annual inflation 0.37% Expected annual British inflation 0.20% Fiji expected one-year interest rate 0.140% Expected British one-year interest rate 0.077%