The problem situation of this training unit will allow you to develop the sub-competencies of mathematical reasoning, investment decisions and critical thinking.
The case considers an investment project in the Mexican Bajío area, an area that has had a great boom thanks to the consolidation of the automotive industry. The case considers an investment to be made starting in 2020 but, due to the COVID-19 sanitary contingency, it is important to consider the impact it will have on the automotive industry and to consider that impact in the financial evaluation of the project.
The evaluation of the project will be carried out with the assumptions of the base scenario and a sensitivity analysis of the results with the effects of the COVID-19 pandemic will be performed.
Case "Chassis and Frames Co".
Chassis & Frames Co. founded in 1985 by J.C. Tello, currently has an operating plant in Detroit, Michigan, and five distribution centers in the Midwest region of the United States. Its two main business units are the manufacture of chassis and bodies for SUVs and Pick-Ups, whose main customers have been Ford, GM and Honda. Based on its business strategy, it has positioned itself as a representative company in the production of chassis and bodywork in the automotive industry production chain.
As a result of the renegotiation of the now called T-MEC, it wants to evaluate the opportunity to establish a plant for the manufacture of chassis and bodywork for SUVs in San Luis Potosi, Mexico, to sell to GM. The investment decision must be made promptly since the Detroit Corporate needs to prepare the Financial Plan for the next 2 years and make the financing decision for the company in general and for the San Luis Potosi project in particular. It is important to take into account that the production and distribution chain of automobiles worldwide has been paralyzed by the closing of plants due to the COVID-19 pandemic.
The Production, Finance, Logistics and Marketing departments have been asked to evaluate the investment project in order to include in the Capital Budget the amount to be invested, which is estimated to be between $40 and $50 million dollars. It is worth mentioning that in the two years of the Financial Plan, 2020 and 2021, only the asset investments for the new plant in San Luis Potosí will be made (see the investment plan in the appendix). In addition, the investment in working capital must be considered. Subsequently, in 2022, the plant will start operating for an undetermined period of time; however, management wishes to perform an analysis for a 10-year period. Other aspects to be considered by management are:

Production and marketing
- The sales forecast was reviewed with marketing management, which shows a sales price for the chassis ranging from $630.00 to $710.00 U.S. dollars per unit. Based on the above, a price of $30,000 pesos per chassis was established for the analysis.
- Base monthly production of chassis or bodies of 10 thousand units at the new plant in SLP. This production would represent in the first year 6% of the total production reported by the company in the last year.
- Sales growth of 5% per year is estimated as a base scenario.
- In addition, a scenario considering the effects of the pandemic will be evaluated and ratified by the finance and marketing departments. The sales forecast derived from the decrease in world vehicle production due to COVID-19 is being forecasted by the sales department. This scenario will be generated based on Fitch's projections (included in the appendix).
- The suppliers of materials, inputs and raw materials are sought to be from Mexico in order to guarantee the regional content defined in the new T-MEC trade agreement. In addition, the number of personnel to be incorporated in the new plant with the production process was determined. The production and sales costs, administrative and operating expenses derived from its expansion in SLP maintain the proportion with respect to sales shown in the last year. In order to evaluate the company's cost and expense structure, the financial statements for the last few years are included. (see appendix).
Financials
- The land for the construction of the plant will be acquired from the initial phase of the project. The land needed to operate is 3 hectares. The price per square meter is $3,000.00 Mexican pesos.
- It is estimated that the construction of the plant, including the permitting process and response time for the environmental impact assessment, will take approximately 12 months.
- The depreciation of the assets is in accordance with Mexican regulations (Income Tax Law). Some excerpts of the law to apply in this case are included in the attached file.
- The attached file includes a schedule of investments with their useful lives and disposal values.
- Income taxes (impuesto sobre la utilidad) will be paid in Mexico at the rate in effect at the current time. In addition, workers' profit sharing (PTU) is considered. For the analysis of this project, a combined effect of 37% of the profits will be considered.
- The investment in working capital (inventory, accounts receivable and accounts payable) is not in line with the indicators shown in the company's financial statements; it is expected to require an investment equivalent to 4 days-sales based on the new supply chains. The working capital would be modified from year to year, so the impact on cash flow during each year of the project is to be seen.
- In addition, the company's estimates include an inflation rate of 3.5% per year for the next 10 years.
- Forty percent of the production will be destined to the GM complex in San Luis Potosí, and 60% to Detroit; therefore, it is necessary to verify both transfers with Logistics. Therefore, 40% of sales will be denominated in Mexican pesos and 60% in U.S. dollars. For decision-making purposes, everything will be denominated in Mexican pesos, with an exchange rate of $22.50 MXP per USD.
- The financing will be through a bank loan for 40% of the initial investment at a rate of 8%, while the rest will be a contribution from the parent company, which requests a return of 25%.

Read the case of "Chassis & Frames Co."; identify the main data to determine the cash flows: initial, operating and terminal. Review the annexes as they will help you to have certain data for the calculation of cash flows, such as depreciation rates, fixed costs, among others.
Once the cash flows have been calculated, calculate the project evaluation methods seen in the previous sessions (TREMA, WACC, IRR, DISCOUNTED INVESTMENT RECOVERY PERIOD) and interpret each one of them under your acceptance or rejection criteria.