Problem Notes - Space Technologies Inc. is considering a temporary investment in San Paulo Brazil by establishing a distribution center (DC). The purpose is to reduce handling cost, create a local market subsidiary for branding, and be closer to its South American customers. This option would require SRT to make an original investment that would amount, in the Brazilian Real of BRL 36.75 million. This investment amount would convert to $7,000,000 at the current spot rate of BRL5.250/$.

The use of the investment will result in fixed assets for the subsidiary. The fixed assets will be depreciated over ten years by the straight-line method. SRTs board has also agreed to invest another BRL15.75 million for working capital. Fixed DC operating cost is $1 million in year one, adding $30,000 per year. As a hedge against the risk, SRT has set a buyout of their investment at the end of the profile period.

CFO wants the work sheet to be set up for Capital budgeting purposes in a three-year profile. SRTs board assumes sale of the venture, would be available to local investors as a going concern at the end of the third year at a price, after all taxes, equal to the net book value of fixed assets alone.

O and T exposure will be handled (1) by having all free cash flow repatriated to the US as soon as possible as dividends, and (2) FE rate experts forecast the U.S. dollar to lose value with BRL0.250 gaining value against the dollar for each year profiled.

Distribution Center variable costs are expected to be 50% of sales price add on. No additional funds will be invested in the U.S. subsidiary during the period under consideration. Local management is expected to operate without needing any loans.

The one set of assumptions on revenue are related to how the distribution center will generate revenue during the profile period. Annual Units handled (sales) will be 700,000/yr1; 900,000/yr2; and 1,000,000/yr3. The add on handling charge per unit is $10/yr1; $10.50/yr2; and $11.03/yr3. Recall that all inclusive expenses have been set as 50% of each units handling charge.

The Brazilian Republic imposes no restrictions on repatriation of any funds of any sort. The foreign corporate tax rate is 25% and the United States rate is 30%. Both countries allow a tax credit for taxes paid in other countries. SRT uses 18% as its weighted average cost of capital, and its financial objective is to maximize present value. The assignment is to determine if the investment is attractive to SRT using a project view and to present SRT board members with a view in dollars.

Again, If SRT had to exit at the end of the analysis profile, recovery sale value of the total investment is expected to be 79% or the net book value of the fixed assets at $7.9 million.

Assumption Exhibit

Project _View ____

Descriptive Terms Value_________

Investment Fixed Assets in BRL 36,750,000

Investment Working Capital in BRL 15,750,000

Exit Sale Value Year Three BRL 43,475,000

Spot Exchange Rate BRL/$ 5.25

Exchange rate future less yearly adjustment BRL - 0.25 each year

Assumption Exhibit
Project View
Descriptive Terms	Value
Investment Fixed Assets in BRL	36,750,000
Investment Working Captial in BRL	15,750,000
Exit Sale Value Year Three BRL	43,475,000
Spot Exchage Rate BRL/$	5.25
Exchange rate future less yearly adjustment BRL	-0.25	each year