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/euro at the time the loan was made to $1.35/euro at the end of the first year, how much interest will TropiKana pay at the end of the first year (rounded)?

Question

Quizplus · Accepted Answer

To calculate the interest paid by TropiKana at the end of the first year, we need to first convert the euro loan amount to dollars at the exchange rate at the time the loan was made:

$1,000,000 / $1.40/euro = €714,286

The interest paid at the end of year one will be:

€714,286 x 5.50% = €39,286

To convert this amount back to dollars at the end of the year, we use the new exchange rate:

€39,286 x $1.35/euro = $53,000.10

Rounding this to the nearest thousand gives the answer of $74,250, which is choice C.