31. MNC Cash Flows and Exchange Rate Risk. Tuscaloosa Co. is a U.S.

firm that assembles

phones in Argentina and transports the final assembled products to the parent, which sells
them in the U.S.. The assembled products are invoiced in dollars. The Argentine subsidiary
obtains some material from China, and the Chinese exporter is willing to accept Argentine
pesos as payment for these exported materials. The Argentine subsidiary pays its employees
in the local currency (pesos), and finances its operations with loans from an Argentine bank
(in pesos). Tuscaloosa Co. has no other international business. If the Argentine peso
depreciates against the dollar over time, will that have a favorable, unfavorable, or neutral
effect on Tuscaloosa Co.? Briefly explain.
Tuscaloosa Co. has no cash inflows in Argentine pesos, but has cash outflows in Argentine
pesos. Therefore, it benefits if the peso depreciates because it can obtain pesos with fewer
dollars and can reduce its cost.