Question 3 International Investment and financing decision.

a) The rate of inflation in India is 25% and their government is taking measures to reduce this rate each year by 2%. The Indian Rupee (INR)/Singapore Dollar (S $) rate is currently 58 INR/S $1. Inflation in the Singapore over the next years is expected to be 5.5% in the 1st year, 4.5% in the second year and 3.5% in the third year. Calculate the exchange rate for the Indian Rupee against the Singapore dollar for the next three years. Critically evaluate the impact of changes in exchange rate on the value of a project which a Singapore company plans to start in India if the net cash flows of the project in Indian Rupee are 900,000 in year 1, 1,200,000 in year 2 and 1,500,000 in year 3. Initial investment needed is RM 1,800,000. Discuss the relationship between inflation and exchange rate; and how could a higher level of inflation in India affects Singapore company (assume Singapore company inflation remains constant). (15 marks)

b) A2Z Co. based in US produces chemicals. It is a major exporter to Europe, where its main competition is from other U.S. exporters. All of these companies invoice the products in U.S. dollars. Is A2Zs transaction exposure likely to be significantly affected if the euro strengthens or weakens? Explain. If the euro weakens for several years, can you think of any change that might occur in the global chemicals market?