1. Fin 570: International Finance Dr. Greco, Summer 2009 Calvin C. Edward M. Vince T. Tiffany T. Rezene A. Calvin C. Edward M. Vince T. Tiffany T. Wiley International WI

2. WI Manufacturer of motors and componentsManufacturer of motors and components “Wiley Inc.” to “Wiley International”“Wiley Inc.” to “Wiley International” Best managers assigned to foreign divisionsBest managers assigned to foreign divisions –Regional managers propose to HQ –Made separately due to difficulties in risk differences About Wiley International

3. WI Richard Esposito’s new policy Uniform domestic and foreign decision making process Regional managers to provide project’s FCFs and NPV Apply U.S. hurdle rate of 9% to all international projects New policies speed up decision making –Consider non-quantifiable factors About Wiley International

4. WI Purpose: Purpose: Increase production capacity Finance a new manufacturing plantFinance a new manufacturing plant –Increase market share and profit margin Gain competitive advantageGain competitive advantage –Foreign firms who face trade barriers –Small domestic firms with a history of quality problems The Brazilian Proposal

5. WI Purpose of Request Quality of workforce and regulationsQuality of workforce and regulations Take advantage of incentive programs from Brazilian governmentTake advantage of incentive programs from Brazilian government Division requests – at R$2.8/US$1:Division requests – at R$2.8/US$1: The Brazilian Proposal

6. WI Financial Justification R$6m training expensed for taxesR$6m training expensed for taxes R$30m will be using 5-year straight-line depreciationR$30m will be using 5-year straight-line depreciation ProjectFinancing Project Financing Purchase equipment from Japan Financing 80% of project with 5-year loan denominated in Yen at 0.5% The Brazilian Proposal

7. Project’s IRR is calculated using CFs denominated in Real while U.S. hurdle rate is 9%Project’s IRR is calculated using CFs denominated in Real while U.S. hurdle rate is 9% 5.5% value (NY’s 6.0% - Japan’s 0.5%) is not an accurate measurement5.5% value (NY’s 6.0% - Japan’s 0.5%) is not an accurate measurement Degree of leverageDegree of leverage –1.5 to 1.0 is preferred –Project will result in ratio of 4.0 to 1.0 Esposito’s Concerns WI

8. WI Political Changes in government policy or the law Changes in government spendingEconomic Changes in inflation rate Exchange rate exposure Background of Brazil

9. WI ‘86: Plano Cruzado Jan ’89: Summer Plan Mar ’90: Plano Collor Jul ‘94: Plano Real Brazilian Inflation Rates

10. WI Fernando Henrique Cardoso Plano Real (Real Plan): Jul. 1994 – Jan. 1999 1.Created social emergency fund 2.Established Unidad Real 1:1 US dollar 3.Opened economy to foreign trade and investment Economic Stabilization Plans

11. Brazilian GDP WI

12. FHP Market Condition US Shipments increased 66% Light vehicle FHP motors 64% Other uses: – Appliance – HVAC – Computer – Industrial Source: The Freedonia Group

13. Market Condition U.S. Market 1993-1998 Percentage of Imported FHP Growth 78% Mature Technology: Desire Low Cost Production WI Source: The Freedonia Group

14. WI Market Condition North America: Demand increased 29% Central/S. America: Demand increased 28% Source: The Freedonia Group

15. Growing South American Free Trade Mercosur : Argentina, Brazil, Paraguay, Uraguay, Venezuela Andean Community: Bolivia, Ecuador, Peru, Columbia Initiated Process to form a Single Trading Bloc in 1999 Market Condition WI

16. Manufacturing in Brazil and sell to: Brazilian domestic market Neighboring market Export to U.S. Takes advantage of exchange rate fluctuation Market Condition WI

17. WI Brazil is more attractive for Automotive FDI Potentially growing domestic automobile market –1:9 car per capita vs 1:2 car per capita in developed countries Technically advanced workforce –Skilled in aerospace and computer Brazilian Proposal

18. WI Brazil is more attractive relative to other South American countries Forecasted to be 6 th largest economy by 2015 Currently, largest economy in Latin America GDP per capita in 2001 is $6,500 – U.S. GDP per capita is $35,505 Brazilian Economic Data

19. Observations Brazil’s growth rate is above South America’s average Brazil’s growth rate is lower volatility Relative GDP Growth Rate

20. Observations Positive FDI Until 1999 – Year of devaluation – Short-term capital flight Negative Trade BalanceAssumption As the Real depreciated, FDI opportunities increased Balance of Payment Chart – Source: http://www.latin-focus.com/latinfocus/countries/brazil/brabop.htm

21. Costs do not change overtime Inflation rate will be stable between 7-9% Automakers will continue to produce more vehicles Lower tariffs will still continue to existAssumptions WI

22. Basic Issues Hedging Risks LowLowHighHigh LowLow HighHigh Political & Economic Risks Standardizing IRRs CBRC Methodology WI Importance Urgency

23. Immediate Issues Hedging Risks LowLowHighHigh LowLow Importance Urgency HighHigh Financing Political & Economic Risks Accept or Decline the Project WI

24. WI Cause and Effect Diagram Political & Economic Stability Exchange Rate / IRR Determination Equipment Financing Industry Viability Project Decision Project Decision

25. IRR for foreign projects > 9% Finance with lowest interest rate   lowest foreign exchange risk Steady increasing cash flows Potential increase in market share Economy with increasing: –Growth rate –Domestic market –Technically advanced work force Decision Making Criteria WI

26. Alternative 1 Accept the proposal with the assumption that all calculations are correct. Accept the project assuming that it generates an IRR of 14.2% Accept financing 80% of project with 5-year loan denominated in Yen at 0.5% WI

27. Alternative 2 Reject the proposal. Reject the internal rate of return assumption WI

28. Alternative 3 Accept the proposal with revised calculations. Break Even Inflation Rate Apply inflation effect to IRR / NPV: Without Inflation Effect: 14.2% IRR & $18.874 CF With Inflation Effect: 10.51% IRR & $16,761 CF Assumed Inflation Rate

29. Alternative 4 Seek another foreign supplier and financier. Assumptions: Inflation rates and interest rates will be around the current level for the next five years. PPP and IFE are at work in these markets WI

30. Financing Options WI

31. Financing Options WI

32. Conclusion IRR: IRR: 10.51% > 9% Financing: Financing: Real > US Dollar > Yen Choose Alternative #3: Accept the proposal with revised calculations Keep the current financing option (Japanese Yen at 0.5%) WI

33. Recommendations Look into future/forward contracts and see if it is cost effective: $800K difference between Yen and U.S. Dollar Look into other financing options in other countries. WI

34. WI Thank you

35. WI