Brasil will import material from the United States having an initial cost of R$360
per ton of output. Administrative expenses in the first year will be R$20 million.- Customers.All production will be sold to unaffiliated buyers in Europe and the
United States at sales prices denominated in Brazilian reals. - Brazilian inflation.Brazilian prices are expected to rise as follow:
Raw material costs: +2% per annum
Labor costs: +5% per annum
General Brazilian prices: +4% per annum
Cacau do Brasil sales prices +4% per annum - Exchange rate forecasting.U.S. inflation is expected to be 2% per annum.
Using the theory of purchasing power parity, the U.S. parent expects the real to
drop in U.S. dollar value steadily in proportion to the ratio of Brazilian to U.S.
inflation, calculated as follows: 1.04/1.02 = 1.0196078, or approximately 1.96%
per annum greater inflation in Brazil. Consequently the exchange rate forecast,
by purchasing power parity, is:
Year 0: R$ 2.8000/$
Year 1: R$ 2.8000 ×1.0196 = R$ 2.8549/$
Year 2: R$ 2.8549 ×1.0196 = R$ 2.9109/$
Year 3: R$ 2.9109 ×1.0196 = R$ 2.9680/$
Year 4: R$ 2.9680 ×1.0196 = R$ 3.0262/$
Year 5: R$ 3.0262 ×1.0196 = R$ 3.0855/$
Year 6: R$ 3.0855 ×1.0196 = R$ 3.1460/$ - Discount rate. The U.S. parent has determined that the appropriate discount
rate for the Brazilian project is 24% per annum. It will use this rate both within
Brazil (project evaluation) and from its own U.S. point of view (parent evalua-
tion). - Working capital.Year-end accounts receivable will be equal to 5% of sales of
the year just finished. Year-end inventory balances will be maintained at 10% of
expected variable costs for the following year. The initial cash balance of
R$5,685,000 will be allowed to increase with retained cash flow in Brazil. - Terminal value. The U.S. parent expects to sell the subsidiary as a going con-
cern after five years for a price equal to the remaining net book value of fixed
assets plus the full value of ending working capital (cash, receivables, and in-
ventory). - Royalties. A royalty fee of 5% of sales revenue will be paid by Cacau do Brasil
to the U.S. parent each year. This fee creates taxable income in the United
States. - Taxes. Brazilian corporate income taxes are 40%, with no additional dividend
withholding tax. The U.S. corporate tax rate is 34%. - Parent exports. Components imported by Cacau do Brasil from its U.S. parent
have a direct manufacturing cost in the United States equal to 90% of their trans-
fer price to Cacau do Brasil. Hence, the U.S. parent earns a dollar cash profit and
cash flow in the United States equal to 10% of all sales to Cacau do Brasil.
Brazilian production and sales will not cause any loss of sales by the U.S. par-
ent from any other operation elsewhere in the world. - Dividends.The U.S. parent intends to have Cacau do Brasil declare 75% of its
accounting profit as dividends each year. Brazilian authorities have approved
this level of remittance.
4 • 12 FOREIGN INVESTMENT ANALYSIS