Schneeberger Inc is considering investing in one of two alte

Schneeberger, Inc. is considering investing in one of two alternatives for increasing the acceleration of its linear motor actuators. The first, alternative X, requires an initial investment of $170,000 and its cash flows exhibit an annual rate of return of i*x = 21%. The second, alternative Y, requires an initial investment of $145,000 and its cash flows have an annual rate of return of i*Y = 19%. Schneeberger’s MARR is 20% per year. Answer the following questions; (a) Will the rate of return on the incremental investment in X be larger or smaller than i*X? (b) What is the expected i*X-Y? The rate of return on the increment is 21% per year. The expected i*X-Y is %. Please show all work.

Solution

The eliminatoion of uncertainity regarding the value of the domestic currency relative tothe US dollar is the most potential benefit arising from this. These countries manitains a peg against the US dollar, so they are differently pegged to each other. There is always a chance of speculative attack, creating addaed risk of that potentially hinders trade with an exchange rate peg. If these countries adopt a region wide currency such as EURO in EU, the risk would be eliminated. The benefits of adopting a single currency will greater if these countries have high rate of integration. From a lack of autonomous monetary policy potential cost arises. The countries within the region would need to establish a region wide central bank as ECB for making monetary policy decession of the region. The cost of forgoimng autonomous monetary policy will be grater if an individual country or group of countries is subjected to assymetric shocks. However because these countries rely heavily on oil exports, they are more likely to experience similiar shocks.