Chapter 9 Management of Economic Exposure
MINI CASE: ECONOMIC EXPOSURE OF ALBION COMPUTERS PLC
Consider Case 3 of Albion Computers PLC discussed in the chapter. Now, assume that the pound is expected to depreciate to $1.50 from the current level of $1.60 per pound. This implies that the pound cost of the imported part, i.e., Intel’s microprocessors, is £341 (=$512/$1.50). Other variables, such as the unit sales volume and the U.K. inflation rate, remain the same as in Case 3.

(a) Compute the projected annual cash flow in dollars.
(b) Compute the projected operating gains/losses over the four-year horizon as the discounted present value of change in cash flows, which is due to the pound depreciation, from the benchmark case presented in Exhibit 9.6.
(c) What actions, if any, can Albion take to mitigate the projected operating losses due to the pound depreciation?

a) The projected annual cash flow can be computed as follows: ______________________________________________________ Sales (50,000 units at £1,000/unit) £50,000,000 Variable costs (50,000 units at £650/unit) £32,500,000 Fixed overhead costs 4,000,000 Depreciation allowances 1,000,000 Net profit before tax £12,500,000 Income tax (50%) 6,250,000 Profit after tax 6,250,000 Add back depreciation 1,000,000 Operating cash flow in pounds £7,250,000 Operating cash flow in dollars $11,600,000 ______________________________________________________

b) ______________________________________________________ Benchmark Current Variables