Sun Ltd. is planning to import equipment from Japan at a cost of 3,400 lakh yen. The company may avail loans at 18 percent per annum with quarterly…

Option I (To finance the purchases by availing loan at 18% per annum): Cost of equipment ₹ in lakhs 3400 lakh yen at 100 = 340 yen 1,000.00 Add: Interest at 4.5% I Quarter 45.00 Add: Interest at 4.5% II Quarter (on 1045 lakhs) 47.03 Total outflow in Rupees 1,092.03 Alternatively, interest may also be calculated on compounded basis, i.e., 1000 × [1.045]² 1092.03 Option II (To accept the offer from foreign branch): Cost of letter of credit At 1 % on 3400 lakhs yen at 100 = 340 yen 10.00 lakhs Add: Interest for 2 Quarters 0.90 lakhs (A) 10.90 lakhs Payment at the end of 180 days: Cost 3400.00 lakhs yen Interest at 2% p.a. [3400 × 2/100 × 180/365] 33.53 lakhs yen 3433.53 lakhs yen Conversion at 100 = 345 yen [3433.53 / 345 ×100] (B) 995.23 lakhs Total Cost: (A) + (B) 1006.13 lakhs Advise: Option 2 is cheaper by (1092.03 – 1006.13) lakh or - 85.90 lakh. Hence, the offer may be accepted.