# factor-rating method to analyze the problem

Daniel Tracy, owner of Martin Manufacturing, must expand by building a new factory. The search for a location for this factory has been narrowed to three sites: A, B, and C. The following table shows the results obtained by using the factor-rating method to analyze the problem. The candidate locations are rated based on the 0-5 scale, with 5 as the most satisfactory.

Factor

Weight

A

B

C

Quality of labor

10

5

4

4

Construction cost

8

3

5

4

Transportation cost

7

3

4

3

Proximity to markets

5

4

3

4

Taxes

6

2

3

3

Weather

4

2

4

5

(a) What are the relative importance weights of the 6 factors? You will use the relative importance weights to calculate the overall ratings of the three locations in Question (b). (10 points)
Hint: The relative importance weight of “Quality of labor” can be calculated as

(b) Which location should Tracy choose? For each site, please provide at least one step of calculation and the correct overall weighting. (14 points)

The following table gives the map coordinates and the shipping loads for a set of cities that we wish to connect through a central hub.

City

Map coordinates (x, y)

A

(5, 10)

5

B

(10, 8)

10

C

(4, 6)

15

D

(6, 5)

8

Using the Centroid method, at what map coordinates should the central hub be located? Please provide at least one step of calculation for each of the two map coordinates of the centroid for full credit. (8 points)

Suppose the direct quote of the nominal exchange rate between U.S. dollar and Euro increases by 2% from the U.S. perspective. The inflation rate in the U.S. is 2% and the inflation rate in France is 3%.

a.      What is the percentage change in the real exchange rate between US dollar and Euro? Please provide the formula and at least one step of calculation for full credit. (6 points)

b.      Is this a currency depreciation or appreciation in the U.S.? Why? (4 points)

Suppose a U.S. company contracted to sell 10,000 units of a product to a French company at a unit sales price of €2 with delivery in 90 days and payment due on delivery. The nominal exchange rate between U.S. dollar and Euro is 1.3 \$/€ on the contract signing date. The U.S. company has the option of using a 90-day forward contract to protect itself against an adverse change in the exchange rate. Based on the assessment of the financial markets, the 90-day forward contract can be purchased at a discount of 2%.

a.      If the nominal exchange rate between U.S. dollar and Euro decreases to 1.2 \$/€ on the delivery date, how much will the U.S. company receive in terms of U.S. dollar on the delivery date? Please provide at least one step of calculation for full credit. (4 points)

b.      If the U.S. company chooses to use the 90-day forward contact to protect against the foreign exchange risk, how much will the U.S. company receive in terms of U.S. dollar on the delivery date? Please provide the forward rate and at least one step of calculation for full credit. (6 points)

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