Q1 is very straight forward. You should discuss why 3P Turbo would invest in Brazil. Discuss the advantages and disadvantages from a macro perspective, relate them to the regional business environment and to the auto industry. You don't need to discuss firm or project level considerations, or spreadsheets result here. Just concentrate on the macro-economic and political factors.

For Q2, you need to calculate the cost of capital for Brazilian cash flows. In the Valuing Cross Border Projects video, you will see a slide on calculating foreign cost of capital. Using the parity conditions (real interest rate parity), you can calculate Brazilian discount rate since we have the differences in inflation for the two countries, and knowing that the discount rate in US is 10% (given on page 8 in the case). Briefly comment on whether the rate you calculated capture the risk of investing in Brazil.

- 3P Turbo: The value of cheap financing (in R$000) (Assuming 3P Turbo entered into a currency swap agreement at 4.2 $R/Euro) 3 Cost of equipment (Euro) 25,000 German Bank Interest Cost 6.0% Cost of equipment (R$) 100,000 Vendor Subsidized Interest Cost 2.0% 5 Spot Exchange Rate (R$/Euro) 4.00 Swap Exchange Rate (R$/Euro) 4.20 6 Value of Loan (90% of Cost) 22,500 Tax rate 34% CO 00 0 2 3 4 5 10 Now 2001 2002 2003 2004 2005 12 Loan Payments in Euro (6%) 5,341.42 5,341.42 5,341.42 5,341.42 5,341.42 Interest Payment (Before tax) 1,350.00 1, 110.51 856.66 587.58 302.34 14 Principal Repayment 3,991.42 4,230.90 4,484.76 4,753.84 5,039.07 15 Interest Payment (After tax) 891.00 732.94 565.40 387.80 199.55 16 Net payment in Euro (6% Loan) 4,882.42 4,963.84 5,050.15 5,141.64 5,238.62 18 Loan Payments in Euro (2%) 4,773.56 4,773.56 4, 773.56 4,773.56 4,773.56 19 Interest Payment (Before tax) 450.00 363.53 275.33 185.36 93.60 20 Principal Repayment 4,323.56 4,410.04 4,498.24 4,588.20 4,679.96 21 Interest Payment (After tax) 297.00 239.93 181.72 122.34 61.78 22 Net payment in Euro (2% Loan) 4,620.56 4,649.96 4,679.95 4,710.54 4,741.74 23 24 Financing Savings (in Euro) 261.86 313.88 370.20 431.10 496.88 25 26 Financing Savings (in R$) 1,099.79 1,318.30 1,554.85 1,810.63 2,086.90 27 28 Present Value of Savings in R$ (@6%) 6,509.95 29 303P Turbo Brazilian Project Valuation (All cash flows are in thousands of R$ unless noted) Cost of Capital (U.S.) US Inflation Cost of Capital (Brazil) Brazil Inflation Cost of building and equipment Tax rate on Profits Cost of Training Before Tax Spot rate (R$/$) Salvage Value Years of Straight Line Depreciation Time 0 2 3 4 5 Year 2016 2017 2018 2019 2020 2021 Projected Volume (000) 28 30 38 44 50 Price Per Unit (R$) 2,400 Production cost Per Unit (R$) 1,050 Selling Cost Per Unit (R$) 300 Administrative cost Per Unit (R$) 100 Revenue Production Cost Gross Profit Selling Cost Administrative Cost Depreciation EBIT Taxes on Profits (34%)Exhibit 1. Brazilian Investment Cash Flows Forecast (Price and Costs Increased by 9% Each Year) (thousands of R$) m: 2016 2012 018 2019 2020 Projected Volume (000) Price Per Unit (R35) Production cost Per Unit (REE) Selling Cost Per Unit (R$) Administrative cost Per Unit (R$) 28 2,400 1,050 300 100 30 2,616.0 1,144.5 327.0 109.0 38 2,851.4 1,247.5 356.4 118.8 44 3,108.1 1,359.8 388.5 129.5 3,387.8 1,482.2 423. 5 141.2 Revenue Production Cost Gross Prot Selling Cost Administrative Cost Depreciation EBIT Taxes on Prots (34%) Aftertax Prot Add Back Depreciation Total Operating Cash Flows Cost of building and equipment Cost of Training After Tax Salvage Value Source: Casewriters' estimates. (120,000) (6,600) 67,200 29,400 37,800 (8,400) (2,800) (24,000) 78,480 34 335 44,145 (9,810) (3,270) (24,000) 108,355 47,405 60,950 (13,544) (4,515) (24,000) 136,755 59,830 76,925 (17,094) (5,698) (24,000) 169,390 74 108 95,282 (21,174) (7,058) (24,000) 2,600 334 1,716 24,000 25,716 7,065 2 402 4,663 24,000 28,663 18,890 6,423 12,468 24,000 36,468 30,132 10 245 19,337 24,000 43,887 43,050 14 63 28,413 24,000 52,413