Reference no: EM1374942
Choose a United States multinational company. In terms of currency denomination, discuss how the company values its revenues and costs. For MNE's with multiple foreign operations, consider any one of those operations and the contribution it is making to the parent firm's profits.
Using this data, what do you think would be the effect of Increases or decreases in the dollar's exchange value on the company's profitability?
Be sure to show all applicable work,
2-3 pages
THIS WAS YOUR RESPOND, CAN YOU ADD TO IT
Solution
For the purpose of this assignment, we select the company IBM( International Business Machines), which has operations all over the world.
IBM has business operations in India in the form of offshore development center for information technology services. The revenues and costs of IBM's India operations are not only done according to the local accounting practices, but are adjusted according to GAAP (Generally accepted accounting practices), which is the standard accepted by all US and global companies. This practice ensures consistence in accounting for companies with global operations. The currency denomination will be in USA dollars to ensure consistency.
IBM's India development center contributes heavily to the firm's profits by savings millions of dollars in salaries. The main reason for shifting the operations to India is the fact that information technology manpower is best and cheapest in India. If a similar scale of operations would have been established in USA, it would have been much costlier as compared to India's operations. Moreover, US dollar is much stronger than Indian Rupee, which makes it even more attractive for IBM to establish operations in India.
In this scenario, any increase in the strength of dollar against Indian Rupee would increase the profitability of IBM as it will have to pay less dollars per rupee spend in India. Similarly, If it is selling some of its services and products in India, it will have to face reduction in profits. The effects will be vice versa in the event of dollars becoming weak against Rupee.
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