1. What are the pros and cons of the international sales? What additional risks will the company face?

2. What happens to the company’s profits if the dollar strengthens? What if the dollar weakens?

3. Ignoring taxes, what are Tuxedo Air’s projected gains or losses from this proposed arrangement at the current exchange rate of $1.35/EUR? What happens to profits if the exchange rate changes to $1.25/EUR? At what exchange rate will the company break even?

4. How could the company hedge its exchange rate risk? What are the implications for this approach?

5. Taking all factors into account, should the company pursue the international sales further? Why or why not?

Mark Taylor and Jack Rodwell, the owners of Tuxedo Air, have been in discussions with a light aircraft dealer in Italy about selling the company’s planes in Europe. Tracy Jordon, the dealer, wants to add Tuxedo Air to his current retail line. Tracy has told Mark and Jack that he feels the retail sales will be approximately €5 million per month. All sales will be made in euros, and Tracy will retain 5 percent of retail sales as a commission, which will be paid in euros. Because the planes will be customized to order, the first sales will take place in one month. Tracy will pay Tuxedo Air for the order 90 days after it is filled. This payment schedule will continue for the length of the contract between the two companies.

Mark and Jack are confident the company can handle the extra volume with its existing facilities, but they are unsure about the potential financial risks of selling their planes in Europe. In their discussion with Tracy, they found that the current exchange rate is $1.35/EUR. At the current exchange rate, the company would spend 80 percent of the sales on production costs. This number does not reflect the sales commission paid to Tracy.

Mark and Jack have decided to ask Ed Cowan, the company’s financial analyst, to prepare an analysis of the proposed international sales. Specifically, they ask Ed to answer the following questions: