_____ On 1/1/06, a foreign unit acquired equipment costing 100,000 local currency units (equivalent to $50,000 on that date). During 2006, the foreign country had 25% inflation and the United States had 10% inflation. On 12/31/06, the direct exchange rate was $.39. At what the amount would the fixed asset be expressed in U.S. dollars under the PPP current-value approach?
A) $39,000
B) $40,000
C) $44,000
D) $48,750
E) $55,000

Question

Quizplus · Accepted Answer

The PPP (Purchasing Power Parity) current-value approach adjusts the value of the asset by the inflation rate difference between the two countries. The foreign country had 25% inflation, and the US had 10% inflation, so the relative inflation difference is 15% (25% - 10%). The original value in local currency (100,000) would increase by 25% due to inflation in the foreign country, becoming 125,000 local currency units. However, for the PPP adjustment, we increase the original $50,000 by the inflation difference of 15%, resulting in $57,500. The direct exchange rate at the end of the year is $.39, but this rate applies to the current value in local currency, not the PPP-adjusted value. The correct approach for PPP is to adjust the original value by the relative inflation difference, not to reconvert at the new exchange rate. Therefore, the mistake here is in the explanation process, leading to confusion about the correct answer. The correct process involves adjusting the original value by the relative inflation difference, which would actually result in a value different from the provided options when strictly following PPP guidelines. However, without applying the direct conversion after inflation adjustment, the calculation provided does not align with standard PPP calculations.

_____ on 1/1/06, a Foreign Unit Acquired Equipment Costing 100,000