Instructions

It is October 1991 and Boston Manufacturing of Boston, Massachusetts, is considering establishing an assembly plant in South America for a new vehicle it has just designed. The cost of the capital expenditures has been estimated at $65,000,000. There is not much of a sales market in South America, and virtually all output would be exported to the United States for sale. Regardless, an assembly plant in South America is attractive for at least two reasons. First labor costs are expected to be half what Boston Manufacturing would have to pay in the United States to union workers.Since the assembly plant will be a new facility for a newly designed vehicle, Boston Manufacturing does not expect any hassle from its U.S union in establishing the plant in South America.Secondly, the chief financial officer (CFO) of Boston Manufacturing believes that a debt for equity swap can be arranged with at least one South American country that has not been able to meet its debt service on its sovereign debt with some of the major U.S. banks.

The October 1, 1991 issue of Barron's indicated the following prices (cents on the dollar) on South American bank debt:

Brazil 21.75

Peru 43.12

Argentina 14.25

Venezuela 46.25

Chile 70.25

The CFO is not comfortable with the level of political risk in Brazil and Argentina, and has decided to eliminate them from consideration. After some preliminary discussions with the central banks of Peru, Venezuela, and Chile, the CFO has learned that all three countries would be interested in hearing a detailed presentation about the type of facility Boston Manufacturing would construct, how long it would take, the number of locals that would be employed, and the number of units that would be manufactured per year. Since it is time consuming to prep and make these presentations, the CFO would like to approach the most attractive candidate first. He has learned that the central bank of Peru will redeem its debt at 80 percent of face value in a debt for equity swap, Venezuela at 75 percent, and Chile at 100 percent. As a first step, the CFO decides an analysis based purely on financial considerations is necessary to determine which country looks like the most viable candidate.You have been asked to assist in the analysis by presenting your findings to the CFO and the board.