Calculate the APV of the project given the following information. Show all of your work with formulas, (pencil them in if you use Excel).

A U.S. firm is planning on locating a new facility in Brazil. This will be its first major foray into international production. The project has a five year estimated life. The projects revenues, operating and financing costs will be in the LC; nevertheless the dollar is the reference currency.

The projects pro-forma data are given in the following table.

	Year 1	Year 2	Year 3	Year 4	Year 5
Revenues LC	R$ 26,396,000	R$ 28,749,450	R$ 31,313,767	R$ 34,105,798	R$ 37,148,139
LC operating costs +	R$ 4,988,000	R$ 5,216,000	R$ 5,458,080	R$ 5,714,305	R$ 5,985,743
Depreciation	20% of R$ borrowing amount	20% of R$ borrowing amount	20% of R$ borrowing amount	20% of R$ borrowing amount	20% of R$ borrowing amount
R$ = Brazilian Real

⁺ Before depreciation

Financing:

The firm has decided to borrow in the local currency (the Brazilian Real) to finance the project. The borrowing will be in R$ (Reals) and will equal the R$ equivalent of $22,000,000 based on todays exchange rate. You need to look up the current exchange rate for the Real (available from the Wall Street Journal Online or other sources; printout the quote sheet and include that with your answer please) and find the equivalent borrowing amount in R$. The firm will borrow the money by issuing five year interest only bonds, with principal repaid at maturity. The firms tax rate is 35% in both Brazil and the U.S., and the firm maintains a 55% debt to capital ratio, although this project will be 100% debt financed. If the project were all equity financed, the required rate of return for the operating cash flows would be 12.00%. The firms normal pre-tax borrowing cost (kd) = 6.50%, but the Brazilian government is willing to buy the bonds and charge only a 4.00% interest rate. Inflation is expected to be 6.00% per year in Brazil and is projected to run about 2.50% in the U.S. You believe that relative purchasing power parity will hold. As noted above, look up the spot rate for the Brazilian real on the web and use that where appropriate (do not use any published forward rates) to calculate expected purchasing power parity based exchange rates. Include your source and the date.

Find the dollar value of each years after tax operating cash flows (OCFs), then find the APV of the project and decide whether the numbers indicate the firm should undertake this investment. Hint: All local currency debt repayments must first be calculated in the LC and then converted to dollars at the parity based exchange rates expected each year before you can calculate the financial components of APV.