Assume you have decided to build one plant in each country to serve the local market and to export as needed. Answer the following questions. For any information not presented, use your own logical assumptions. You do not have to research facts elsewhere.

1. Pick any country and determine the currency risk. You only need to pick one country but consider both a weakening and strengthening of the local currency against the currencies of the other two countries.

2. Pick a plant in a different country than part A. Choose one of the following scenarios and describe the implications for that countrys plant, including changes in the returns. Describe how you might adjust your business model if you expected these changes to remain for several years.

Choose only one of the following scenarios:

1. To protect its local supply of batteries, China has imposed a 100% tariff on exported batteries. Therefore, the cost of batteries sold outside of China is twice what it was.
2. The U.S. has imposed 50% tariffs on all imported electric vehicles, replacing the tariffs it had in place prior.
3. The Brazilian Economic Miracle took hold. Inflation is now forecasted at 2% per year while inflation in the US is seen as 3% per year. Chinese inflation expectations remain at 5% per year. The Brazilian Real is now at R2.5 : $1. Here is the information provided in the case study used to answer the question:

   Edison is a new company that plans to introduce an electric car using a novel battery technology available in China. You will need to make decisions about where to build plants to satisfy demand in three countries: Brazil, China and the U.S., which the following currencies:

   Brazilian Real (BRL), Chinese Yuan (CNY) and US Dollar ($).

   Your marketing department tells you that it has identified three key markets for the cars.

   Country	Expected Annual Demand	Expected Price
   Brazil	100,000 cars	BRL 112,000
   China	150,000 cars	CNY 210,000
   United States	200,000 cars	$ 30,000

   Your in-house economist gives you the following analysis of each country

   Country	Exchange Rate	Expected Annual inflation rate
   Brazil	3.7 BRL: 1 USD	10%
   China	6.9 CNY: 1 USD	5%
   United States		2%

   The economist also suggests that political uncertainty in Brazil has led to a decrease in foreign direct investment. The exchange rate has been steady for the last year, but the economist noted a sharp drop in foreign reserves. Brazils central bank has no stated policy about the exchange rate.

   China has seen strong economic growth and continued strong foreign investment. Most analysts, including your economist, feel that the government would be comfortable with a 3% to 5% annual decrease in the value of the CNY vs. the USD.

   The U.S. is also seeing strong economic growth but not at the pace of China. Your economist found no signs to suggest that the currency is mispriced vs. most other world currencies, including the Real and the Yuan.

   Your Production Department Reports on the following costs of production in each country:

   While steel and aluminum are typically priced in USD, the local producers in Brazil, which tends to be a low-cost producer of steel and aluminum, are willing to price in Brazilian reals for local factories. There is only one source for your battery, which is a Chinese-based producer that sells in CNY.

   Please note the currency for each entry. Each entry is the price per car

   Cost Item	United States	Brazil	China
   Aluminum	$2,000	BRL 4,000	$2,000
   Steel	$2,000	BRL 4,500	$2,000
   Battery	CNY 70,000	CNY 70,000	CNY 70,000
   Labor and Other	$5,000	BRL 20,000	CNY 32,000

   Other information for the production department:

4. It costs $1,000 to ship each car from one country to another country. Shipping rates are quoted in USD globally.
5. Cars entering Brazil from another country face a 20% tariff.
6. Cars entering China from another country face a 25% tariff.
7. Cars entering U.S from another country face a 10% tariff.
8. Your marketing department does not feel that you can pass along the tariff to customers. You must leave prices at the levels they provided above
9. There are no tariffs on imported parts in any of these countries.

10. Your production department also provides the following estimates on the cost of building a plant. It will take 3 years to complete the plant and the cost will be 40% in year 1, 20% in year 2 and 40% in year 3. The cost is for a plant that produces 150,000 cars/year. Smaller plants are inefficient to build.

    Country	Annual Production	Cost
    Brazil	150,000 cars	BRL 12.5 billion
    China	150,000 cars	CNY 19.8 billion
    United States	150,000 cars	$4 billion

    The finance department reports on your ability to raise capital:

    You finance department alerts you to the local tax rates:

    Tax Rates
    Brazil	25%
    China	35%
    United States	30%

    They also tell you that Edison can hedge using futures up to a three-year term using the forward rates in the market, which will naturally reflect interest rate differentials. Edison can also use put or calls options up to 1 year. The cost for any currency hedge to the USD is 2 cents per $1 hedged for a 3-month option that is at the money. Add 1 cent per option for each additional 3 months until expiration, up to 1 year.

    Edison can issue equity or bonds in any of these markets or elsewhere in the world. You have decided to raise 75% of the construction costs in debt.

    Here are the current government interest rates in each country. Edisons borrowing costs will be 3 percentage points higher than the equivalent maturity in the country where it issues the bonds.

    	3 months	6 months	1 year	5 years	10 years	30 years
    Brazil	6.0%	6.5%	7.0%	8.0%	9.0%	10.0%
    China	5.0%	5.5%	6.0%	6.0%	7.0%	8.0%
    U.S.	2.0%	2.5%	2.75%	3.0%	3.5%	4.5%