This chapter has described the investment analysis, or capital budgeting process,
for both a home country and an international project, and it has explained how dif-
ferent accounting procedures will influence the cash flow estimate.
To illustrate the process, an example is given in Appendix A. A more detailed sum-
mary of principal accounting differences around the world is provided in Chapter 12.
APPENDIX A: ILLUSTRATIVE INTERNATIONAL CAPITAL BUDGETING EXAMPLE
To illustrate complexities than can arise in the analysis of a foreign investment
proposal, a capital budgeting analysis for Cacau do Brasil, S.A., a proposed invest-
ment in a chocolate factory in Belém, Brazil. is presented. The U.S. parent will in-
vest the entire equity of R$56,000,000, or US$20,000,000 at the current exchange
rate of R$2.80 = US$1.00. (“R$” is the symbol for Brazil’s currency, the real.)
If established, Cacau do Brasil, S.A. will have an initial balance sheet as shown in
Exhibit 4A.1.
Cacau do Brasil is expected to operate as follows:
- Sales.Unit sales will grow at 3% per annum. Initial unit sales will be 25,000
tons, and the initial sales price will be R$5,000 per ton. Initial labor cost is
R$2,000 per ton and initial local material will cost R$200 per ton. Cacau do
APPENDIX A 4 • 11CACAU DO BRASIL, S.A.
Initial Balance Sheet, Year 0
(In Thousands of Brazilian Reals)Cash R$ 5,685 Long-term debt R$ 24,000
Accounts receivable 6,250
Inventory 8,065
Net plant & equipment 60,000 Common stock equity 56,000
——— ———
R$ 80,000 R$ 80,000
Note 1:Net plant and equipment will be depreciated on a straight line basis over eight
years, with no salvage value.
Note 2:Long-term debt of R$24,000,000 will be the sole obligation of Cacau do Brasil and
will not be guaranteed by the U.S. parent. The regular market interest rate for a Brazilian
real debt of this type is 14%, but Cacau do Brasil is borrowing at a subsidized interest rate
of 5% per annum arranged by Brazilian development authorities. The debt will be paid off
in five equal annual installments of R$5,543,000, payable at the end of each year, calcu-
lated as follows (rounded to one thousand reals):
End of Interest at 5% Total Principal Remaining
year Principal per Annum Service Reduction Balance
1 24,000 1,200 5,543 4,343 19,657
2 19,657 983 5,543 4,560 15,097
3 15,097 755 5,543 4,788 10,309
4 10,309 515 5,543 5,028 5,281
5 5,281 262 5,543 5,281 –0–Exhibit 4A.1. Initial Balance Sheet.