Introduction InthispaperwewillanalyzeinformationaboutBrazilandIndia.Theapproachwewilltakeisthatofamanufacturing organizationconsideringexpansionintotheseregions.Wewillthendiscussthechoicewhichwasmaderegarding whatcountrywouldbethebestoptionforourcompanytoexpandin.Nextwewillidentifythedifferenceswithin eachcountryscurrencyandexchangeratesaswellastheiroverallstability.Wewilluseforeignexchangeandcost ofcapitaldatainordertodeterminetheappropriatecapitalsources.Wewillevaluatetheinformationobtainedfrom oursensitivityanalysisandansweravarietyofwhatifscenariostoreiterateourchoiceposition.Wewillinclude informationaboutalternativeinvestmentandfinancingdecisionsthatmaychangeourposition.Wecanutilizethe toolsofthecapitalbudgetingtechnique,inordertojustifyourchoices.Duringthisevaluationwewilldevelopa contingencyplanbasedupontheidentifiedchangingglobalriskfactors.Thenfinallysummarizeourdecisions. CountryofChoice Indiaseconomyisoneofthefastestgrowingeconomiesintheworld.ManycorporationshaveenteredtheIndian marketbyoutsourcingjobs,whichinturnhavehelpedtheeconomy.Theeconomyhaspostedanaveragegrowth rateofmorethan7%inthedecadesince1994,reducingpovertybyabout10percentagepoints.Indiaachieved7.6% GDPgrowthin2005,significantlyexpandingmanufacturing.

TherecenteconomicdevelopmentshaveprimarilyhelpedupperandmiddleclassIndians.PovertyinIndiahas reducedsignificantly,22%ofIndiansstilllivebelowthepovertylevel.Since1950,governmentshaveimplemented variousschemes,underplanning,toalleviatepoverty. CorruptionhasbeenoneofthemainproblemsaffectingIndia.Ittakestheformofbribes,evasionoftaxandexchange controls,andembezzlement.Theeconomicreformsof1991reducedtheredtape,bureaucracyandtheLicenseRaj thathadstrangledprivateenterpriseandwasblamedforthecorruptionandinefficiencies. Themaineconomicconsequencesofcorruptionarethelosstotheexchequer,anunhealthyclimateforinvestment andanincreaseinthecostofgovernmentsubsidizedservices.UnemploymentinIndiaischaracterizedbychronic underemploymentordisguisedunemployment.AnothercriticalproblemfacingIndia'seconomyisthegrowing regionalvariationsamongIndia'sdifferentstatesandterritoriesintermsofpercapitaincome,poverty,availabilityof infrastructureandsocioeconomicdevelopment.Thefiveyearplanshaveattemptedtoreduceregionaldisparitiesby encouragingindustrialdevelopmentintheinteriorregions. Withthedatawefound,wefeltthatBrazilwouldnotbeagoodchoicetoexpandourmanufacturingcompany. Brazilseconomywasseverelyaffectedbythedevaluationofthereal(Braziliancurrency)in1999.Thisdevaluation occurredafterBrazilscentralbankgovernorresignedinJanuaryof1999,hissuccessorallowedthecountrys currencytodevalue8%againstthedollar.AtthattimeitwasbelievedthatBrazilwouldgainfromthecheaper currencybecauseitwaswidelythoughttobeovervalued. However,Brazilhasfacedalongrecovery,inOctober2002,withthecountry'sfinancesteeteringonthebrinkof disaster,aleftwingcandidatewithlittlegovernmentexperience,LuizIncioLuladaSilva,wonthepresidency (thoughonlyafterpromisingtostickwithorthodoxeconomicpolicy).MrdaSilva'sfirstyearinofficeencouraged markets,ashedeliveredreformsofthepublicsectorpensionssystemandthetaxcode.Growthfinallyreturnedin 2004,andin2005BrazilannouncedthatitwouldrepayearlyitsIMFloans.Buteconomicgrowthhasbeenslow comparedwithotherLatinAmericancountries,andbroaderreformisunlikely(TheEconomist,2006).Consideringthe pastproblemsthatBrazilhasfaced,wefeltthatinthelasttwoyearsBrazilhasshownpromisebutstillwouldnotbea smartdecision.ThefollowingchartsshowthecurrencyratesoftheBraziliancurrencyagainsttheU.S.dollar,andthe IndiancurrencyagainsttheU.S.dollar.WiththisinformationwefeltthatIndia'scurrencyhasremainedmorestable thanBrazil's. IndiaBrazilExchangeRateFluctuationsBraziliancurrency(BRL)hasdecreasedoverthelastfiveyears,seetable5. Thisdecreasemayhaveadirectrelationshipwiththeexpandinggapbetweenexportsandimportsoverthelastfive years.Indiacurrency(Rupee)hashadlittlefluctuationoverthelastfiveyears.Attimesthecurrencyhasseemed volatile,especiallybetween2004and2005. BothcountriescurrencyseemstobeweakeningagainsttheU.S.dollar.Withthisinformationthecompanymaywant

toconsiderinvoicingthegoodsintheforeigncurrencyratherthanintheU.S.dollar.Itmaybemoreprofitableto opensubsidiariesinthesecountriesandbuymaterialsneededfromwithinthecountry,ratherthanexportingfromthe U.S. ForeignExchangeandCostofCapitalDataIndiaIndia'sBalanceofPayments200506(InUS$million)Items200506 (AprilJune)200405(AprilJune)CreditDebitNetCreditDebitNetCURRENTACCOUNT1.Merchandise Trade217543756315809178402301451742.Invisible,Net264961688896081820996458564TotalCurrent Account4825054451620136049326593390CAPITALACCOUNT1.ForeignInvestment13006110901916933585377982. Loans694660488986717383128863.BankingCapital4697347312246089433617534.RupeeDebt Service1421422772775.Othercapital,net3750596315412571951694Totalcapital account2839921349705023398189324466ERRORS&OMISSION398398286286OVERALL BALANCE7704775800124759447518777570MONETARYMOVEMENT1247124775707570IMFForex Reserve1247124775707570Source:ReserveBankofIndiaItems200405 (P)200304200203200102200001199091TradeBalance38,13015,45410,69011574124609437Invisibles, net31,69926,01517,03517,0359,794243CurrentAccountBalance6,43110,5616,3456,3452,6669,680Capital Account32,17520,54210,84010,8408,8407,056OverallBalance2615931,42116,98516,9855,8682,492ForeignExchange ReserveIncrease(+)/Decrease()26,15931,42116,98516,9855,8421,278Source:ReserveBankofIndiaAnnualreport (200405) CurrentEconomic ConditionsBrazil Brazilhastheninthlargesteconomyintheworldatpurchasingpowerparityasof2006.Marketopeningand economicstabilizationhavesignificantlyenhancedBrazilsgrowthprospects.Brazilstradehasalmostdoubledsince 1990(wikipedia.com). Largeandwelldevelopedagricultural,mining,manufacturing,andservicesectorscharacterizeBrazilseconomy Brazil'seconomyoutweighsthatofallotherSouthAmericancountriesandisexpandingitspresenceinworld markets.From200103realwagesfellandBrazil'seconomygrew,onaverageonly2.2%peryear,asthecountry absorbedaseriesofdomesticandinternationaleconomicshocks.In2004,Brazilenjoyedmorerobustgrowththat yieldedincreasesinemploymentandrealwages.Thethreepillarsoftheeconomicprogramareafloatingexchange rate,aninflationtargetingregime,andtightfiscalpolicy,allreinforcedbyaseriesofIMFprograms(cia.gov). Thecurrencydepreciatedsharplyin2001and2002,whichcontributedtoadramaticcurrentaccountadjustmentin 2003to2005,Brazilranrecordtradesurplusesandrecordeditsfirstcurrentaccountsurplusessince1992. Productivitygainsparticularlyinagriculturealsocontributedtothesurgeinexports,andBrazilin2005surpassed thepreviousyear'srecordexportlevel.Whileeconomicmanagementhasbeengood,thereremainimportant economicvulnerabilities.Themostsignificantaredebtrelated:thegovernment'slargelydomesticdebtincreased steadilyfrom1994to2003straininggovernmentfinancesbeforefallingasapercentageofGDPin2005,while Brazil'sforeigndebt(amixofprivateandpublicdebt)islargeinrelationtoBrazil'ssmall(butgrowing)exportbase. Anotherchallengeismaintainingeconomicgrowthoveraperiodoftimetogenerateemploymentandmakethe governmentdebtburdenmoremanageable(cia.gov). TheBrazileconomystillhasgreat,challengestofaceandimportantreformsarestilltobeimplemented.Serious problemsinvolvingpoorinfrastructure,incomeconcentration,lowqualitypublicservices,corruption,socialconflicts andgovernmentbureaucracypersistandthreatentosloweconomicgrowth.Theinternalpublicdebthasreachedthe alltimerecordandpublicexpenseshavebeenincreased.Taxesalreadyrepresentaconsiderablepartofnational incomeandareaseriousburdentoallsocialclasses,decreasingopportunitiesforinvestment.Also, entrepreneurshipisburdenedbyhighlicensingcosts,bureaucracyandcorruption. Energyrelatedenvironmentalproblems,includingoilspills,airpollutionfloodinganddeforestationhavebecomea threattoBrazil'sbiodiverseanddelicateecosystems. BrazilisaleaderinLatinAmericaintheuseofrenewableenergysources,mainlyhydroelectricityandethanol.The country'senergyshortagein2001forcedthegovernmenttobeginrestructuringitsenergymixhydroelectricitywill remainthemainsourceofelectricpower.Withthisthegovernmentwillstrugglewithintroducingthermalpower

plants(naturalgas)intoasystemdominatedbylowcosthydroelectricplants.ThisAirpollutionprobleminBrazilis becauseofrapidurbanizationinseveralcitiesthatlacktheinfrastructuretosupportthegrowingpopulation. BrazilAssetsBrazilboastsabundantandvariednaturalresourceswitharelativelydiversifiedeconomy. Manufacturedproductsrepresentanincreasinglylargeproportionofproductionandexports. Fiscalandmonetarypolicieshavebeenpragmatic. Theimprovementinexternalfinancialratioshasbeensignificant. Thedomesticmarket'spotentialandlowlaborcostshavebeenattractiveassetsforforeigninvestors. WeaknessesPublicsectordebthasremainedhigh,vulnerabletointerestratevariations,anditsmaturityisstilltoo short. Thelevelsofdebtandexternalfinancingneedshaveremainedsubstantial. Thelowlevelofdomesticsavings,mainlyabsorbedbythegovernment'sfinancingneeds,haslimitedthe investmentcapacityofprivatecompanies. Highdomesticinterestrateshavealsobeenadeterrenttoinvestment. Thepresidenthaslittleroomformaneuver,havingtocompromisewithaparliamentarycoalitionwhiletakingpublic aspirationsandeconomicconstraintsintoconsideration. India Indiaseconomyincludesfarming,handicrafts,modernindustries,andservices.Servicesarethemajorsourceof economicgrowth.ManycorporationshaveenteredtheIndianmarketbyoutsourcingjobs,whichinturnhavehelped theeconomy.Agriculturemakesupaboutthreefifthsoftheworkforce,leadingtheUPAgovernmenttoarticulatean economicreformprogramthatincludesdevelopingbasicinfrastructuretoimprovethelivesoftheruralpoorand boosteconomicperformance.Theeconomyhaspostedanaveragegrowthrateofmorethan7%inthedecadesince 1994,reducingpovertybyabout10percentagepoints.Indiaachieved7.6%GDPgrowthin2005,significantly expandingmanufacturing.IndiaiscapitalizingonitslargenumbersofwelleducatedpeopleskilledintheEnglish languagetobecomeamajorexporterofsoftwareservicesandsoftwareworkers(cia.gov). India'songoingpopulationexplosionhasplacedgreatstrainonthecountry'senvironment.Therapidlygrowing population,alongwiththemovetowardurbanizationandindustrialization,hasplacedsignificantpressureonIndia's infrastructureanditsnaturalresources.Deforestation,soilerosion,waterpollutionandlanddegradationcontinueto worsenandareslowingeconomicdevelopmentinruralIndia,whiletherapidindustrializationandurbanizationin India'sboomingmetropolisesarestrainingthelimitsofmunicipalservicesandcausingseriousairpollutionproblems. Followingthe1984Bhopaldisasterinwhichatoxicleakfromthecity'sUnionCarbidechemicalplantresultedinthe deathsofmorethan3,000peopleenvironmentalawarenessandactivisminIndiaincreasedsignificantly. Indiafacessignificantchallengesinbalancingitsincreaseddemandforenergywiththeneedtoprotectits environmentfromfurtherdamage.Sheerpopulationgrowthandurbanizationmakethetaskallthemoredifficultfor theIndiangovernment,asincreasedvehicleownershipwillcontributetoexistingairpollutionproblemsand urbanizationraisesthehealthrisksfromthatpollution.Therapidlyincreasingpopulationwillalsoleadtoanincrease inelectricitydemand,taxingthealreadystrainingpowergeneration,transmissionanddistributioninfrastructureand puttingpressureonthepowersectortoaddnewcapacitytothesystem.Theseshortagesofelectricitywillhave heavyimpactsonIndia'sindustrialgrowth. IndiaAssets Gradualeconomicliberalizationsince1991hasfosteredadynamicofdurablegrowthnotablyinthemanysectors protecteduntilthen. Dynamiclocalcompanieswithinternationalscopehaveconstitutedarealcompetitiveassetincompeting internationally. Thecountryboastsdefiniteadvantagesinmanysectors,particularlyinservices(computers,outsourcing)butalso inindustry(pharmaceuticals,textiles,andsoon). Indiaboastssubstantialmarketpotentialbuoyedbyarapidlydevelopingmiddleclass.

ForeigndebthasbeenmoderatewithforeignexchangereservesatcomfortablelevelsWeaknessesThepublic
sector'sfinanceshavebeeninpoorshapewithitsdebtburdenunsustainableinthelongterm. Thecountrysuffersfrommajorinfrastructuredeficiencies. Theevictioneffectofgovernmentborrowingandastilltoorigidbusinessenvironmenthaveimpededprivate companyinvestment. Thecomplexpoliticalenvironmenthasnotalwaysbeenconducivetoreforms. Despiteongoingprogress,theKashmirquestioncontinuestobeanelementofuncertaintyinthehistoricallyhostile relationsbetweenIndiaandPakistan. TransactionExposure OurmanufacturingcompanywishestoconductbusinessineitherIndiaorBrazil,wewouldneedtomeasureits exposureineachcurrency.Todothiswewillsaythatourexpectedinflowwouldbe10,000,000andourexpected outflowwillbe1,000,000overtheperiodofamonth.AtthebeginningoftheperiodtheIndianRupeesexchangerate was.022376andtheBrazilianrealwas.465766,attheendoftheperiodtherateschange.ThenewrateforIndian Rupeewouldbe.0226732andtheBrazilianrealwouldbe.468066,seechartsbelowforchangesBid/AskSpreadIn determiningthebid/askspreadofIndianorBraziliancurrencywewillneedtocalculatetheconversionofeach currency.Wewilldothisbyassumingwewanttoconvert$1000USDstoeachtypeofcurrency.Thefollowing calculationsshowthebid/askspreadasofDecember17,2006IndianRupeeBidAsk$44.686$44.690*Bid/Ask informationobtainedonDecember17,2006 fromhttp://finance.yahoo.com/currency/convert?amt=1&from=USD&to=BRL&submit=ConvertConvertingUS dollarstoIndianRupee(INR)$1000.00/44.690=22.376INRConvertingbacktoUSDollars22.376x44.686=$999.89 USD$1000.00<.11>BrazilianReal(BRN)BidAsk$44.686$44.690*Bid/AskinformationobtainedonDecember17,2006 fromhttp://finance.yahoo.com/currency/convert?amt=1&from=USD&to=BRL&submit=ConvertConvertingUS dollarstoBrazilianReal(BRL)$1000.00/2.1470=465.766BRLConvertingbacktoUSDollars465.766x2.1470=$999.99 USD$1000.00<.01>SensitivityAnalysisSubsidiariesofMNCstypicallysendfundsbacktotheirparentstorepay innercompanyloans,remitdividends,andpayforsuppliesandotheradministrativeservices.Whenhost governmentsexperienceaforeignexchangeshortage,theymayblockthetransferoffundsbacktotheparent.Thusit willadverselyaffecttheparentcompany.ThisisbecauseitwillnotgetanyfundsfromitsBraziliansubsidiary. SupposetheParentcompanyhasinvested$2millionandtheSubsidiarywantstorepatriatebacktoit.Itwillnotbe abletodothisiffundsareblocked.TheParentcompanywillbedeprivedofthiscashinflow.ThusParentscash inflowwillbelessby$2mn. Fromtheperspectiveofthesubsidiary,whatifthesubsidiaryprovidedthefunds?Ifsubsidiarysprovidedthefunds thenitmaynothaveasgraveimpactasifthefundsareprovidedbytheParentcompany.Supposethesubsidiary hadmadeprofitsof$1millionandwantstosendittotheParentcompanyasadividendthenitwillnotbeabletodo thisifthefundsareblocked.TheParentcompanywillbedeprivedofthiscashinflow.ThusParentscashinflowwill belessby$1million. Howdoesthesourceofcapitalaffectthesubsidiaryandtheparentcompany?SourceofcapitalaffectstheWACCof thebusinessofthesubsidiarycompany.WACCmeansweightedaveragecostofcapital.Herethebasicprinciples applicabletoaninternationalinvestmentdecisionaresimilartoadomesticinvestmentdecision.Theincrementalcash flowoftheinvestmentshouldbediscountedatanopportunitycostofcapitalappropriatetotheriskofthe investment.Theinvestmentshouldbeacceptedifthenetpresentvalueispositive. InternationalRiskandSourceofCapital Onefactorthatdistinguishestheinternationalinvestmentdecisionsfromthedomesticinvestmentdecisionsisthat cashflowsareearnedinforeigncurrency.Thisfactshouldbeconsideredwhileestimatingtheincrementalcash flows.MoreoverFirmsmustconstantlyassessthebusinessenvironmentsofthecountriestheyarealreadyoperating inaswellastheonestheyareconsideringinvestingin.ThisWACCshouldbeadjustedbythecountryrisk. ProblemincalculationofBetaandcalculatingcostofequity Betaofaforeigninvestmentcanbecalculatedbyregressingtheprojectsreturntoabenchmarkmarketindex.Infully integratedinternationalfinancialmarkets,boththefirmsandtheindividualinvestorsarefreetoinvestanywherein

theworld.Inthiscase,theprojectscostofcapitaldoesnotdependonanycountry.Investorscoulddiversify internationallyandobtaintheinternationaldiversificationbenefitsthemselves.Inthiscase,betaiscalculatedrelative theworldmarketindex. POLITICALRISKOFFOREIGNINVESTMENTS Therearetwowaysinwhichafirmcanhandlethepoliticalrisksintheinvestmentevaluation.Thefirmmayincrease thecostofcapital(discountrate)toallowforthepoliticalrisksoradjusttheinvestmentscashflowstoaccountfor politicalrisk:FulfillmentofDisclosurerequirementsofStockexchangeThecompanyhastoadditionallyfulfillthe disclosurerequirementsoftheinternationalstockexchange.Thismayincreasethecostasthecompanyisunder greatersurveillance.ForexampleifsomeinternationalcompanywantstolistintheUS.Theyhavetocomplywiththe rulesandregulationsofSEC.SECrequirespubliccompaniestodisclosemeaningfulfinancialandotherinformationto thepublic,whichprovidesacommonpoolofknowledgeforallinvestorstousetojudgeforthemselvesifa company'ssecuritiesareagoodinvestment.Onlythroughthesteadyflowoftimely,comprehensiveandaccurate informationcanpeoplemakesoundinvestmentdecisions(SEC,2006).TheSECalsooverseesotherkeyparticipants inthesecuritiesworld,includingstockexchanges,brokerdealers,investmentadvisors,mutualfunds,andpublic utilityholdingcompanies.TheSECisconcernedprimarilywithpromotingdisclosureofimportantinformation, enforcingthesecuritieslaws,andprotectinginvestorswhointeractwiththesevariousorganizationsandindividuals. Whatsource(s)ofcapitalwouldminimizethecostofcapitaltothesubsidiary?Afirmslongtermsuccessdepends uponthefirmsinvestmentsearningasufficientrateofreturn.Thissufficientorminimumrateofreturnnecessaryfor afirmtosucceediscalledthecostofcapital.Thecostofcapitalcanalsobeviewedastheminimumrateofreturn requiredtokeepinvestorssatisfied.Thusitisusedtoknowtherateofreturnexpectedbytheinvestors. Costofcapital(WACC)=(CostofEquityxProportionofequityfromcapital)+(CostofdebtxProportionofdebtfrom capital)+(CostofPreferencesharexProportionofpreferencesharefromcapital). EquityincludesretainedearningsandthecostofR/Eistakenatcostofequity.Costofequitycapitalisthe opportunityreturnfromaninvestmentwithsameriskasthecompanyhas.Costofequityisusuallydefinedwith Capitalassetpricingmodel(CAPM).Theestimationofcostofdebtisnaturallymorestraightforward,sinceitscostis explicit.Costofdebtincludesalsothetaxshieldduetotaxallowanceoninterestexpenses.Incaseofpreference shares,thedividendratecanbetakenasthecostsinceitistheamount,whichthecompanyintendsonpaying againstpreferenceshares.Asisthecaseofdebttheissueexpensesordiscount/premiumonissuealsoshouldbe takenintoaccount. Thuscostofcapitalisusedtoevaluatetheproject.Itisalsoknownasdiscountrate.Itmeasuresthecostofcapital onamarginal,aftertaxbasis.TheDebtiscalculatedposttaxbecauseinterestistaxdeductible.Butincaseofstocks dividendisnottaxdeductible.Hencesimilaradjustmentisnotmade. Thustheinterestcostofdebtisataxdeductiblecost.Optimalcapitalstructureisthatmixtureofdebtandequitythan minimizesitsweightedaveragecostofcapital(WACC).Sincetheaftertaxcostofdebtislowerthanequityformany corporations,whynotusedebtonlyormostly?Itturnsoutthat,whiledebtreducesacompanystaxliabilitybecause interestpaymentsaredeductibleexpenses,increasingamountsofdebtraiseboththecostofequitycapitalandthe interestrateondebtbecauseoftheincreasingprobabilityofbankruptcy.Inotherwords,higheramountsofdebt raisethefinancialriskofacompany,andthisriskisreflectedonthecostofallthetypesofcapitalthecompanyuses. Assuch,therelationshipbetweenfinancialleverageandWACCisnotastraightline,butmoreofaUshapedcurve, withaminimumWACCbetweentheextremesofdebtutilization.Yes,apartfromtheriskassociatedwithafirms fundamentaloperations,riskcanbeintroducedbytheuseoffinancialinstrumentswithfixedpayments,more commonlyknownasdebt.Thefirmissuesdebt,whichchangesitsWACC,whichchangesvalue. Thefactorstotakeintoaccountinclude:TheVolatilityofRevenuesfirmswithstablerevenuestreamscansafely useahigherDFLtoboostearnings. AssetSpecificity(generalpurposevs.specialized)firmswithgeneralpurposeassetscanhaveahigher DFL:OperatingLeveragefirmswithahighDOLshouldusealowDFLandviceversaDTLshouldbemaintainedat

areasonablelevel. GrowthRatelowerflotationcostsfavortheuseofdebt,buthigheruncertaintyfavorstheuseofequity. Profitabilityhighlyprofitablefirmscangroworganically,byusingretainedearnings. ControloftheFirmtheeffectsareimportantbutdontunequivocallyfavordebtoverequity. ManagementAttitudesthereisroomformanagerialjudgmentindeterminingafirmsoptimalcapitalstructure. CapitalMarketAttitudesandConditionsratingagencyattitudesandmonetarypolicycanaffectthechoiceof capitalinstrument. FirmsInternalConditionsthechoiceofdebtorequitycanbeinfluencedbywhethermanagementthinksthefirm isovervaluedorundervaluedbythemarket.Signalingtheoryisrelevanthere. FinancialFlexibilityfirmsneedtobeabletofundpositiveNPVprojects. UseofMarketValuesthesearetherelevantvaluestouseincapitalstructurecomputations.Awellmanagedfirm shouldhavesomereserveborrowingcapacityinordertotakeadvantageofbusinessopportunitiesastheyarise. Whathappensifthecountryyouhavechosenhasprovidedincentivestoinvest?Nowthatyourcompanyhas startedtobecomeprofitable,thecountryistakingtheincentivesback.Howdoyoudeterminetheresidualvalueat theendoftheprojectlife?IfthecountryIhaveselectedhaschosentoprovideincentivestoinvestwithdrawsthe incentives. First,thetypesofincentivesthatacountrygivesaretaxholidays,lowertaxratesandlowratesofinterestforloans. Second,theneteffectoftheseincentivesistomakethelocationattractiveforinvestment. Third,theseincentivesreducethecosttoyourcompanyandthishastheeffectofincreasingtheprofitsofyour company. Fourth,whatthequestionissayingisthatthegestationperiodisnowoverandyourcompanyhasstartedearning profits,however,atthesametimethegovernmenthasstartedwithdrawingtheincentives,soineffectthe governmentisreducingtheprofitsandtheprofitabilityofyourcompany. Fifth,usuallytheincentivesthatareofferedaregivenforaperiodoftimeandduringthistimethegovernmentdoes notwithdrawincentives,itwouldgoagainstthecredibilityofthegovernment.So,thecompanyassumesusingthe principleofconservatismthatallincentivesgivenbythegovernmentwillbewithdrawnattheendofthetaxholiday period,inotherwords,thecashinflowthatiscalculatedaftertheholidayperiodwillbereducedbytheamountof fulltaxleviedonlocalcompaniesandinterestpaymentatthemaximumratechargeabletolocalcompanies.Fromthis modifiedcashflow,theterminalvalueiscalculated. For,exampleifthegrowthrateis5%andthediscountrateis14%andthecashflowis48millionthentheterminal valuecanbecalculatedas48(1+0.05)/(0.140.05).Thisisusingthestandardcapitalizationformulae=cashflow(1+ growthrate)/(discountrategrowthrate). Expirationoftheprojectlife: Thenumberofyearthatareleftfortheexpirationoftheprojectaretaken,theannualcashflowfromtheprojectis taken,theterminalvalueiscomputed.Anetpresentvalueofthecashflowsincludingtheterminalvalueiscalculated usingtheexpectedrateofreturn.Thenetpresentvalueiscomparedwiththeproposedinvestmentinthepurchaseof thecompany. Friendlyorunfriendlybuyout: Ifthereisafriendlybuyouttherequisitestockissoldatapredeterminedpricebythemanagementofthecompany. So,thevalueoftheorganizationispredetermined.Ontheotherhandincaseofanunfriendlybuyoutthevalueofthe organizationisbasedontheestimatesofpricesatwhichthestockscanbepurchasedfromtheopenmarket. Economicdecisionstochangelocationarebasedontheadvantagesthatthecompanywillenjoyatthenewlocation. Inthiscasethevalueoftheorganizationwillchangetotheextentthatthepresentvalueofextracashflows, generatedbymovingtothenewlocation,exceedthecostofmovingtothenewlocation.Iftheorganizationis nationalized,thevalueoftheorganizationisdeterminedbythepricethegovernmentpaysascompensationforthe nationalizationorconfiscationoftheorganization.

ContingencyPlan IfallofthesensitivityanalysisinformationleadsusinadirectionawayfromourinitialdecisiontoexpandintoIndia, wewouldthenevaluatethepossibilityofholdingoffourexpansionatthistime.Someoftheseotheroptionsmay includeresearchingandperformingthesameanalysisevaluationswithalternativecountrychoices.Exploringthe possibilityofexportingourproductoveraperiodoftimemaygiveusadditionalresourceinformationthatmayassist usinfuturedecisionstoexpandbeyondourcurrentborders. Summary Basedonthecountryriskanalysis,thebalanceofpaymentinformation,andthesensitivityanalysisonbothIndia andBrazil,weconcludethatifthecompanywishestoexpandIndiawouldbethemostpromising.Themainfactors thatcontributedtothisdecisionarethecurrentstateandpasthistoryofeachcountry.Takingintoaccountthe stabilityofeacheconomyaswellasthecurrencyfluctuationsthatmayaffectouroverallprofitduetotheconversion rates.Hedgingagainstthecurrencyortakingadvantageofoptionscanrequirealargeamountofourcompanies profitandputthecompanyatrisk.AlthoughIndiasRupeevalueissmallcomparedtotheUSdollarwestillfeelthat thischoicewillbeabenefittoourcompanyifwemanageourfundscorrectly.Thecompanymayultimatelybeableto takesomeofthesavingsfromthisdecisionandinvestitinothermarketstogenerateevenmorefundsthatcanpay forfutureexpansionsofthecompany.

References EconomyofIndia.(2006,December29).InWikipedia,TheFreeEncyclopedia.Retrieved21:40,December31,2006, fromhttp://en.wikipedia.org/w/index.php?title=Economy_of_India&oldid=97090538EconomyofBrazil.(2006, December30).InWikipedia,TheFreeEncyclopedia.Retrieved21:39,December31,2006,from http://en.wikipedia.org/w/index.php?title=Economy_of_Brazil&oldid=97243152BrazilBalanceofPaymentinformation retrievedonDecember9,2006fromhttp://www.bcb.gov.br/?BALANCEPAYEconomicinformationforBrazilandIndia retrievedonDecember10,2006from https://www.cia.gov/cia/publications/factbook/geos/br.htmlhttp://www.rbi.org.in/scripts/BS_ViewBulletin.aspxMadu ra,J.,2006.InternationalFinancialManagement,8thEd.,chapter16and11.PublishedbyThomson/SouthWestern, copyright2006. TheEconomist,1999.StormCloudsfromBrazil.ArticleretrievedDecember27,2006from http://www.economist.com/research/backgrounders/displaystory.csf?story_id=182028TheEconomist,2006.Brazils Economy.ArticleretrievedDecember27,2006from http://www.economist.com/research/backgrounders/displayBackgrounders.cfm?bg=616685Additional Websiteshttp://www.tradingsafely.com/http://finance.yahoo.comwww.wikipedia.comwww.investopedia.comhttp://w ww.eia.doe.gov/emeu/cabs/indiaenv.pdfhttp://www.eia.doe.gov/emeu/cabs/brazenv.htmlBrazilBalanceofPayment informationretrievedonDecember9,2006fromhttp://www.bcb.gov.br/?BALANCEPAYEconomicinformationfor BrazilandIndiaretrievedonDecember10,2006from https://www.cia.gov/cia/publications/factbook/geos/br.htmlhttp://www.rbi.org.in/scripts/BS_ViewBulletin.aspxStatist icsBriefOECDhttp://www.oecd.org/dataoecd/32/34/2078177.pdf*Bid/AskinformationobtainedonDecember17,2006 fromhttp://finance.yahoo.com/currency/convert?amt=1&from=USD&to=BRL&submit=ConvertResource Readings:InternationalFinancialManagement,8thCopyright2006Thomson/SouthWesternSensitivityanalysis. (2007,January4).InWikipedia,TheFreeEncyclopedia.Retrieved02:52,January9,2007,from http://en.wikipedia.org/w/index.php?title=Sensitivity_analysis&oldid=98512768SensitivityAnalysisEOF: 19952005. http://home.ubalt.edu/ntsbarsh/senanaly/SenAnaly.htmInvestopediaCopyright2007Investopedia,Inc. http://www.investopedia.com/terms/s/sensitivityanalysis.aspSensitivityanalysisofnormativeeconomicmodels: Theoreticalframeworkandpracticalstrategies.DavidJ.PANNELLCopyrightDavidJ.Pannell, 1997http://www.general.uwa.edu.au/u/dpannell/dpap971f.htmNJITCIS634InformationRetrievalFall02Instructor:Dr. Y.F.BrookWUMaterial:KorfhageCh13CopyRight2002