Exhibit 4A.2 shows a growing annual revenue, accompanied by increased costs.
Line 17 indicates that the project is profitable in every year, and line 18 shows the ex-
pected cash dividend to the U.S. parent.
Exhibit 4A.3 shows the annual increase in accounts receivable, inventory, and
cash balances. Note that receivables levels are based on sales of the past year, while
inventory levels depend on expected sales for the following year. This means that
variable costs for the sixth year must be calculated to determine inventory required
at the end of the fifth year.
Exhibit 4A.4 shows the current asset balances after five years of operations—bal-
ances that are necessary to calculate the terminal value.
Exhibit 4A.5 shows the calculation of terminal value at the end of five years. Ter-
minal value is equal to the ending net book value of plant and equipment, plus end-
ing current assets. Obviously a terminal value many years in the future is subjective,
and other methods of estimating this future value are possible. At the end of five
years the U.S. parent expects to sell Cacau do Brazil for R$65,753,000 as derived in
Exhibit 4A.5.
The present value of the subsidized loan is calculated in Exhibit 4A.6. The essence
of the calculation is that the actual payments, based on equal annual payments that
amortize the principal and that pay interest at 5%, are discounted at 14%, the inter-
est rate that would have been paid on a similar nonsubsidized loan. The present value
of the subsidy (in year 0) is R$4,970,000.
PROJECT VALUATION
Exhibit 4A.7 shows that the present value of operating inflows, calculated on an all-
equity basis, is R$61,671,000. To this must be added the net present value of the sub-
sidized loan, calculated in Exhibit 4A.6, which is R$4,970,000. Subtracting the orig-
inal outlay of R$56,000,000 leaves a positive net present value of R$10,641,000.
From the point of view of the project, the investment is worthwhile.
The fact that Cacau do Brasil has a positive net present value of R$10,641,000
as a domestic project means that the project is a reasonable use of economic re-
sources within Brazil. It also suggests that a domestic Brazilian corporation would
find the project worthwhile, although of course a domestic corporation might not
be able to sell production outside of Brazil as easily as the subsidiary of a foreign
corporation with worldwide operations. In other words, the technology and mar-
keting ability of the U.S. parent add to the cash generating ability of Cacau do
Brasil.
A positive project net present value, however, does not mean that the investment
is worthwhile from the parent’s perspective. A separate calculation based on cash
flows from and to the parent company is necessary. Such a calculation is shown in
Exhibit 4A.8.
PARENT VALUATION
The value of Cacau do Brasil, S.A. to its U.S. parent is calculated in Exhibit 4A.8 to
be a negativeUS$1,567,000. As designed, the investment is not worthwhile from the
point of view of the U.S. parent.
4 • 14 FOREIGN INVESTMENT ANALYSIS