TropiKana Inc., a U.S firm, has just borrowed euro 1,000,000 to make improvements to an Italian fruit plantation and processing plant. If the interest rate is 5.50% per year and the Euro depreciates against the dollar from $1.40/€ at the time the loan was made to $1.35/€ at the end of the first year, how much interest and principle will TropiKana pay at the end of the first year if they repay the entire loan plus interest (rounded)?

Question

Quizplus · Accepted Answer

Step 1: Calculate the amount borrowed in dollars at the exchange rate at the time the loan was made: 
1,000,000 euro x $1.40/euro = $1,400,000

Step 2: Calculate the amount of interest paid at the end of the first year:
$1,400,000 x 5.5% = $77,000

Step 3: Convert the outstanding loan balance at the end of the first year to dollars at the new exchange rate:
1,000,000 euro x $1.35/euro = $1,350,000

Step 4: Add the interest paid to the outstanding loan balance to get the total amount due at the end of the first year:
$1,350,000 + $77,000 = $1,427,000, which rounds to $1,424,250.

Therefore, the best choice is D.