Question 3

Tourle Enterprises is considering opening a new branch in Brazil. The setup costs are

estimated to be 5 million Brazilian Real (BRL), with expected cash flows of 4.8 million

BRL in year 1 and 5.3 million BRL in year 2. The current interest rate is 5.5% p.a. in

Australia and 12.5% p.a. in Brazil (both rates quoted with annual compounding). Tourle

believes the appropriate required rate of return on this type of investment in Australia

would be 7% p.a. The current AUD/BRL exchange rate is 2.3116.

(a) If Tourle were to evaluate this project using Brazilian Real values, what required

rate of return should it use?

(b) Should Tourle go ahead with the project?