Final answer:
The value of Jensen Co.'s project establishing a subsidiary in Mexico will be favorably affected if the Mexican peso depreciates during establishment and appreciates when operations begin, i.e., answer 1) depreciates; appreciates.
Step-by-step explanation:
The question asks about the impact of the Mexican peso's value on a U.S. company's establishment of a subsidiary in Mexico. The value of Jensen Co.'s project will be favorably affected if the peso depreciates while the company is establishing the new subsidiary and appreciates when the subsidiary starts operations. Therefore, the correct answer is 1) depreciates; appreciates.
When the peso depreciates while setting up the subsidiary, the initial investment and operational costs will be lower in terms of U.S. dollars, making the establishment of the subsidiary cheaper for Jensen Co. Once operations begin, an appreciating peso means that when earnings are remitted back to the U.S., they will convert to more U.S. dollars, improving the financial returns of the subsidiary.
External factors such as inflation and exchange rate expectations can influence the value of the peso. High inflation generally leads to depreciation, while positive expectations about the future exchange rate can cause the currency to appreciate. Additionally, events like Mexico exporting goods to Canada and U.S. investors receiving returns from investments in Mexico are economic activities that can also impact the exchange rate.