Financial Viability Assessment For A New Project In Brazil By US Company

Overview of the Project Assessment

Discuss about the International Business Finance for Brazilian Industry.

The assessment is mainly conducted to identify the financial viability of the new project that will be conducted in the Brazil by the US Company. The calculations are mainly conduced to understand the expenses and revenue, which is portrayed by the new project. In addition, the financial performance of the company has mainly evaluated, which could generate higher return for US company and Brazilian subsidiary. The cash generated from the project is evaluated on certain circumstances and determine whether the operation will generate high rate of return from investment.

Particulars	Year 1	Year 2 Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	Year 3	Year 4	Year 5
Revenue	BRL    25,200,000.00	BRL    26,712,000.00	BRL    28,314,720.00	BRL    30,013,603.20	BRL    31,814,419.39
Variable cost	BRL    11,200,000.00	BRL    11,872,000.00	BRL    12,584,320.00	BRL    13,339,379.20	BRL    14,139,741.95
Fixed cost	BRL      2,000,000.00	BRL      2,120,000.00	BRL      2,247,200.00	BRL      2,382,032.00	BRL      2,524,953.92
Depreciation facilities	BRL            7,200,000	BRL            7,200,000	BRL            7,200,000	BRL            7,200,000	BRL            7,200,000
Depreciation machine	BRL            3,600,000	BRL            3,600,000	BRL            3,600,000	BRL            3,600,000	BRL            3,600,000
Profit Before tax	BRL      1,200,000.00	BRL      1,920,000.00	BRL      2,683,200.00	BRL      3,492,192.00	BRL      4,349,723.52
Tax	BRL          300,000.00	BRL          480,000.00	BRL          670,800.00	BRL          873,048.00	BRL      1,087,430.88
Profit After tax	BRL          900,000.00	BRL      1,440,000.00	BRL      2,012,400.00	BRL      2,619,144.00	BRL      3,262,292.64
Working capital					BRL      6,000,000.00
Salvage value facilities					BRL          43,200,000
Cash Flow	BRL    11,700,000.00	BRL    12,240,000.00	BRL    12,812,400.00	BRL    13,419,144.00	BRL    63,262,292.64

Particulars	0	1	2	3	4	5
PV of parent cash flows		2,900,000.00	3,012,962.96	2,496,114.20	2,590,700.82	4,039,639.38
Initial investment by parent	-12,600,000.00
Cumulative NPV	-12,600,000.00	-9,700,000.00	-6,687,037.04	-4,190,922.84	-1,600,222.02	2,439,417.37
NPV	2,439,417.37

Particulars	0	1	2	3	4	5
PV of parent cash flows		2,900,000.00	2,635,185.19	2,396,032.58	2,179,891.18	3,132,148.59
Initial investment by parent	-12,600,000.00
Cumulative NPV	-12,600,000.00	-9,700,000.00	-7,064,814.81	-4,668,782.24	-2,488,891.05	643,257.54
NPV	643,257.54

From the overall evaluation the NPV of hedged cash flow and non-hedged cash flow can be identified. This relevantly indicates that hedged cash flow will provide higher NPV for the company, as it will increase the profits that will be generated from the trading. Hence, the organisation should use hedging measure for reducing the losses that is incurred from operations (Titman, Keown and Martin 2017). Thus, the hedging measure is the most viable option presented to the organisation

Particulars	0	1	2	3	4	5
PV of parent cash flows		2,516,666.67	2,666,358.02	2,300,951.76	2,397,190.48	11,044,178.12
Initial investment by parent	–    12,600,000.00
Cumulative NPV	–    12,600,000.00	–    10,083,333.33	–      7,416,975.31	–      5,116,023.55	–      2,718,833.07	8,325,345.06
NPV	8,325,345.06

 Using the debt option from US:

Particulars	0	1	2	3	4	5
PV of parent cash flows		2,900,000.00	3,012,962.96	2,496,114.20	2,590,700.82	4,039,639.38
Initial investment by parent	-12,600,000.00
Cumulative NPV	-12,600,000.00	-9,700,000.00	-6,687,037.04	-4,190,922.84	-1,600,222.02	2,439,417.37
NPV	2,439,417.37

From the overall evaluation it could be assumed that debt from BRL is much viable option for the company, as its NPV is the highest. Therefore, the company should use debt from BRL and ignore the debt from US parent company. The higher NPV in case of BRL is only obtained due to the low tax paid by the subsidiary in their home country for conducting operating of the project (Hamilton and Webster 2015).

The use of stock issue can be conducted by the form in US and Brazil for raising the required level of capital, which could support the financial requirements of the project. In addition, conducting a share issue in Brazil the company needs to register in the stock market and there is a long process, where the stock would receive the required capital from the issue. Moreover, the second factor that is involved in the share issue is listing the parent company in the Brazil without which the adequate capital from the stock market cannot be raised by the company. The factor such as risk-free rate, market return and risk of the company also needs to be evaluated before the listing and issue that could be conducted by the parent company in Brazil. However, the issue could be conducted in US, where the parent company actually exists, which might help in generating the required level capital from the issue (Meyer and Peng 2016). The beta of the company is well determined, as it is present in US, which might help in generating the required level of capital for the proposed project. Therefore, the capital issue in US might help in generating the required money without incurring extra cost of listing in Brazilian market. The conversion rate might also be an adequate factor, which night help in supporting the project. The risk-free interest rate of US is mainly at the level of 3%, while the interest rate of Brazil is detected at 7%, which relatively reduces the expected return of stocks listed in US. Hence, the issue conducted by the parent company in US might help in reducing the cost of equity and improve Weighted average cost of capital (Shenkar, Luo and Chi 2014). Therefore, the difference in factors relevantly indicates that the parent company should issue shares in US, as it might help in generating adequate capital for the project.

Financial Evaluation of the Project

The negative impact of financial crisis will directly affect the operational capability of the project and reduce the demand from customers. In addition, the crisis would also have a negative impact on exchange currency of USD and Brazil, which might directly affect the revenue received by parent company in US. Moreover, the financial performance might directly have a negative impact on currency valuation, as the volatility in the capital market could erode the revenue and capability of the company to operate in the competitive market (Yugendhar and Ali 2017). The decline in demand of sunscreens could increase due to the negative impact of the financial crisis, as it might hamper consumer power all around the world, which reduces their ability to spend money in luxury market. The negative impact of the crisis will directly affect currency valuation of USD and BRL, where it might hamper the revenue collected by the US parent.

Moreover, the shortage of funds at the subsidiary could be overcome by reducing the expense conducted on operations. The declining demand of sunscreens in Brazil could be supported by reducing the production level of the company (Antras and Foley 2015). In addition, the financial performance of the company could be reduced by ongoing financial crisis, which could be supported by decreasing its financial expenses. The reduction in expenses and laying down the number of employees would eventually help in reducing the overhead cost incurred by the company. This measure could eventually help the company to support the shortfall in relevant funds that is needed for the company’s survival during the financial crisis (Perlmutter 2017).

Conclusion and recommendation:

The assessment mainly indicates the financial viability of the proposed project, which will be stared in Brazil by the US parent. In addition, the calculation relevantly indicates the financial stability of the project in generating high returns from investment, which is detected by the calculation NPV. Moreover, the evaluation of the project conducted under difference circumstance and currency rate also depict the financial viability of the project. Hence, it is recommended for the management to approve the project on certain circumstance. The debt finance will be conducted by the Brazilian subsidiary and not the US parent. Furthermore, the forward rate and hedging process also needs to be conducted by the company to minimise the negative impact from currency volatility and generate high returns from investment.

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