Jing Xu, Weirui Wang

Our recommendation is to invest in Brazil now. Using the Discounted Cash flow method, the net present
value of the project under German Vendor’s 2% loan rate has the value of $ 47591. Since the NPV is >0,
we should invest. Key assumptions involve the loan rate of 2 %, a constant inflation rate of 9% and a
constant tax rate of 34% and the volume should be as projected to justify the assumption.
Analysis of having manufactured facility in Brazil
--Tariff incentives. Brazil joined the Mercado Comúm do Sul custom union, which provides members with
a 0-tariff barrier incentive. If set up a manufacturing facility in Brazil, 3P turbo would enjoy the 0-tariff benefit
when it tries to export car produced to the member countries.
--Labor for incentive. Given Brazil’s long history in auto manufactured industry, highly skilled capable work
force is available all over Brazil. Setting up a manufacturing facility in Brazil will face no hardship in finding
adequate labor force.
--Unsustainable government protective tax program. Brazil government’s protective tax program towards
the local manufactured industries is ending in 2017 and future carry-on of the program is still a mystery.
--Potential intensify international competition. The protective tax program has triggered wrath on the
International market. Both the EU and Japan had launched trade disputes against Brazil in the WTO,
arguing that it unfairly favored local content over imports. If Brazil government compromise with the WTO,
auto manufacture factories in Brazil will face intense global competition.
Brazil political& economic analysis on 3P turbo’s investment
The Brazil’s political environment is a turmoil. Millions of Brazilians show their disgust government
involvement in the corruption scandal involving Petrobras and wanted the president either resign or be
impeached. The economic is also a disaster. The inflation rate is constantly above 10% and the
unemployment rate is also high.
Risks & opportunity involve
--Currency exchange risk. As the inflation is high each year, the net income transfer back to the USD is
greatly reduced all else equal.
--Policy volatility risk. With unstable political status within Brazil, the policy of regulation should change in
an unpredictable manner. 3P turbo might spend extra capital and time to changes accordingly if any policy
changes do happen during the investment period.
--Access of bigger market size. If 3P Turbo could help OEM companies attain turbochargers in a cost-
effective way, it could potentially become a preferred supplier to the automakers in Brazil. Now the cash
flow forecast only focuses on the after-sale auto market, if 3P turbo can get the orders with firms mentioned
above, its future cash flow will be greatly improved.
DCF analysis
To do a discounted cash flow model, we first find out the free cash flow of each year. Since the cash flow
statement uses a straight-line depreciation, there is no need to add back the salvage value. The stated
cash flow is the free cash flow company will get at the end of the year. Then we choose the discounted rate
of 2% as it is the potential loan rate 3P Turbo is going to get if they invest in the project. Here, we want to
see if the future cash flow can cover up the 2 percent interest rate. The impact of low interest loan from
German vendor (2%) is huge as it is a reflection on calculating the NPV. As the loan rate gets higher, the
lower the NPV value, with all else equal. (Exh.1)
The debt even not included in the DCF model may impact the company’s future asset statement. Hence
to control the risk of Brazilian currency inflation, we use a 4.20 R$/Euro future rate to lock the loan payment
for the projected time (The loans are pay back at Euro, the control is unavoidable).
Sensitivity analysis
Inflation is always changing due to the unstable political situation in Brazil. In the past 20 years, the inflation
rate varied from 3% to 17/18%. (Exh.2) It is in doubt that it will keep constant at 9% for the following 5 years.
Also, as the project’s profit margin grows, company would have the potential to landed on a higher tax rate.
In order to determine the different NPV under the different situations, we change the inflation rate in 8%,
9%, 10%, 12% and apply tax rate in 30%, 35%, 40%, 45%. When we use 30% tax rate and 12% inflation
rate to calculate, we can get the largest NPV. Use 45% tax rate and 8% inflation rate to get the smallest
NPV. Hence, there is a negative relationship between tax rate and NPV and a positive relationship between
inflation and NPV. However, whether such positive relationship can bring parent US company in profits in
dollars is to be discussed (if without locked exchange rate). (Exh.3)
Exhibit 1

Exhibit 2

Exhibit 2

Exhibit 3