Jensen Co. wants to establish a new subsidiary in Mexico that will sell computers to Mexican customers and remit earnings back to the U.S. parent. The value of this project will be favorably affected if the value of the peso ____ while it establishes the new subsidiary and ____ when the subsidiary starts operations.
A) depreciates; appreciates
B) appreciates; appreciates
C) appreciates; depreciates
D) depreciates; depreciates

Question

Quizplus · Accepted Answer

If the peso depreciates while the subsidiary is being established, Jensen Co. will be able to purchase assets and goods (such as land, buildings, and equipment) in Mexico at a lower cost. This will reduce the initial investment required to establish the subsidiary, which will increase the project's value. On the other hand, if the peso appreciates after the subsidiary starts operations, Jensen Co. will be able to convert the earnings from pesos back to U.S. dollars at a higher rate. This will increase the value of the subsidiary's earnings when they are remitted to the U.S. parent.

Jensen Co Wants to Establish a New Subsidiary in Mexico That