Subject: Business and Management
Topic: GLOBAL ECONOMY FORCES
Language: English (U.S.)
Pages: 2
Instructions
The purchasing department has found an excellent global positioning system circuit card in Germany that can provide your firm with a competitive advantage in the marketplace. Delivery of the circuit cards is 6 months from date of order. The German firm has offered your firm a 2.5% discount on the €3.5 million purchase if paid up front at the time of order; otherwise, the full €3.5 million will be payable in 6 months before delivery, providing that inflation in Germany does not exceed 1.0% for the year. If inflation exceeds 1.0% for the year, the rate of inflation would be added to the €3.5 million. Find out how inflation has been affected after the European Union trade agreement and introduction of the euro. Is inflation likely to increase? Why or why not? Your supervisor has asked for a recommendation on how Navigation Systems, Inc. should handle the payment and the probable cost of each scenario. You know that your firm's weighted average cost of capital is 9%. Assume that a going concern business will, at a minimum, recover the WACC to achieve at least a breakeven financial position. Therefore, any capital the firm has will generate at least the WACC in returns. Deliverable: Create an Excel spreadsheet detailing the cost of each scenario, and embed it into a Word document. Provide your recommendations in the Word document as well. Word document must be in apa format Word document must be at least 600 words long Excel spredsheet must be embed into word document and also include originall showing work

Global Economy Forces

The euro is the shared currency among the members of the Eurozone. The euro is advantageous for the member countries because it contributes to low inflation, long-term investments, and stable economic growth. The member countries have enjoyed a convergence of their inflation rates, which was at 2% in January 1 1998. The inflation rates decreased because of the Maastricht Treaty made sure that member countries decrease their deficits in order to be eligible to join the union. The lower inflation rates and interest rates led to the stimulation of the European economies (Sturm, Fritsche, Graff, Lamla, Lein, Nitsch, Liechti, and Triet, 2009).

The monetary unification also led to lower inflation uncertainty, a major component of inflation. The aggregate inflation rates in the region were unaffected by the euro cash changeover (Hartmann & Herwartz, 2009). Studies by Vidarsson and Junesved (2008) carried out a number of studies on the impact of the euro on the inflation rate. The duo discovered that the Maastricht Treaty had led to the reduction of the inflation rate dispersion between 1992 to 1997. This shows that the treaty had a significant impact on the convergence of inflation rates in the Eurozone during that period. There were co-integration relationships in countries such as Portugal and Austria.

The researchers also discovered that the introduction of the euro was the main cause of divergence of inflation rates for the member states of the European Union. This was during the period of 1998 to 2007. The lack of co-integration relationships with the average rate of inflation further supports this hypothesis.

 Therefore, the company does not need to worry that inflation will rise before it can be able to make its payments for the global positioning system circuit.

References

Hartmann, M., & Herwartz, H. (2009). Did the introduction of the Euro impact on inflation uncertainty? - An empirical assessment.

Sturm, J., Fritsche, U., Graff, M., Lamla, M., Lein, S., Nitsch, V., Liechti, D., & Triet, D. (2009). The euro and prices: changeover-related inflation and price convergence in the euro area.

Vidarsson, A., & Junesved, P. (2008). How did the Euro affect inflation rates in the EMU?