What is the essence of Productos de Madera’s investment project?

Analyze its feasibility on the US

market.

Productos de Madera, S.A. was fairly large Costa Rican company which was considered to be one of the
largest local manufactures of fine furniture and wood casings for electronic products. The turnover of the
company reached 447 mln colones in 1983 (~11 mln US dollars).

The economic recession Costa Rica faced at the beginning of 1980s stimulated Productos de Madera to
search for new ways of ensuring its profitability and financial stability. Although it was already operating on
the US market via an agent, devaluation of the national currency impelled the company to reconsider the
performance of business overseas. For Sr. Mischelson it was obvious that the shrinking domestic market and
unfavorable economic condition could no longer provide any growth of sales.

The agency system proved to be rather efficient on the initial stage of operating on the US market. However,
company needed development of its business badly and it was high timу ещ expand its operational
activities. The rate of increase in sales stagnated, and the business lost a part of its profit margins as the
agent’s commission. Moreover, even diligent agents could never replace the company’s loyal employees; the
company had to rely on the agent’s perception of the market losing some control over marketing and brand
image. It was high time for Productos de Madera to shift its operation on the foreign markets from indirect
presence to direct in order to diversify the economic risks the company had to face due to the economic
downturn in Costa Rica.

The Managing Director opted for establishing an own office in the USA; a feasibility study was conducted so
as to evaluate the overall feasibility of the project.

On one hand, transforming the supportive export activity into the main source of boosting the volume of
sales demanded an immense amount of funding, which was considered as a dominating factor. Bearing in
mind that the debt-to-equity ratio amounted to 2.56, the manager clearly understood that the company was
highly leveraged and an unsuccessful investment could result in insolvency of the whole business.
Furthermore, the US market was a tough one to operate on because of the complicated legislation,
especially in respect of foreign legal entities. When Productos de Madera operated indirectly, all the arising
legal issues were solved immediately by the agent who was a US legal entity. The agent was also better
aware of all the peculiarities. Starting to operate directly meant dealing with the US legislation face-to-face,
with new rivals and new customers, that demanded both money and time.

On the other hand, the growing US market promised lucrative prospects for further growth; hence, the
initial investments were expected to be recouped in the short run. According to the pro-forma income
statement made up by Productos de Madera’s analysts, the promised net income after taxation would equal
$52.2 mln in 1984 and was expected to increase nearly threefold in four years. In 1988 net income after
taxation would be $172.8 mln. In total company could earn $537 mln. At the same time the company’s gross
sales would only double. However, total earnings of $537 mln and rising sales within 4 years would not cover
the initial investment oа $900 mln.

But considering the fact that CINDE, the Costa Rican export-promotional agency, could up to 95% costs
borne by the exporters by conducting feasibility studies of export projects. Half of the funds was provided
completely free if the project was undertaken. Productos de Madera exploited this opportunity to carry out
its market research. The total investment made by the company decreased to the amount of $450 mln.
Considering these values, this project is worth investing into. Moreover, the project would provide return on
investment int the middle of 1988.
In addition, the company could expect to be encouraged on the part of the US government, which was
interested in attracting direct foreign investments. Establishing an office would create new jobs and enhance
the social wellfare, operating on the market would result in additional taxes received by the state budget.
Thus, the US government was likely to facilitate Productos de Madera’s financial injection in the economy.

When conducting the feasibility study, Miami was chosen as a location to establish the company’s office in
the USA. Its proximity to San Jose could help to optimize the logistic issues; the cultural issues could be put
aside because of its predominantly Hispanic population. The city provided an excellent access to the local
market, acting out as a financial capital of the whole Latin America. However, establishing a separate office
in Miami required a sufficient amount of money to be invested. Besides, new production facilities required
new staff. The company could either send employees from San Jose or hire local people. The former would
provide Productos de Madera with loyal staff; the latter demanded time for training the new-comers but did
not interfere into the production process in Costa Rica.

To draw the conclusion, it is vital to mention that the depressing economic conditions and the company's
poor financial health gave the company an impulse to move forward, since the need for drastic changes in
the sales' structure was obvious. The option which was chosen by Productos de Madera's management
seemed to be quite promising according to the conducted feasibility study, though required substantial
investments.