Risk Management

The overall assessment aims in evaluating the project that has been presented to the American company, which produces body care products. The project relatively evaluates the opportunity for the American based organisation in South America.

Running head: RISK MANAGEMENT
Risk Management
Name of the Student:
Name of the University:
Authors Note:

RISK MANAGEMENT
Executive summary
The overall assessment aims in evaluating the project that has been presented to the
American company, which produces body care products. The project relatively evaluates the
opportunity for the American based organisation in South America. The Pretty Face
organisation can adequately invest in Brazil and create a subsidiary in the region to
accumulate high level of revenues in the long run. The analysis has also been provided on
the debt option, which can be used by the organisation to improve its return. The analysis
directly indicated that using the loan in Brazil would be more beneficial Endeavour for the
organisation, as it will reduce the cash outflows US bank. Moreover, the equity issue need to
be conducted in United States, as it would allow the parent company to acquire the
required funds without any hassle and support the overall project in Brazil. The impact of
financial crisis is relatively problematic for all the organisations engulfed in operations.
Therefore, reduction in overall expenses would be more beneficial for the Organisation in
Brazil during the financial crisis as revenues and cash flow would be declining due to the
capital market meltdown.
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Table of contents
1. Introduction...................................................................................................................................4
2. Depicting the annual cash flows in BRL that would be remitted to United States.........................4
3. Calculating the annual cash flow that Pretty face receive.............................................................5
3.1 Cash flow when subsidiary hedges BRL$8 million annual........................................................5
3.2 Cash flow when no revenue is hedged....................................................................................6
4. Identifying the best option for Pretty face.....................................................................................7
4.1 Using the debt from US............................................................................................................7
4.2 Using the debt from BRL..........................................................................................................8
5. Elaborating on the factors that is driving the difference between issuing the share in US and
Issuing shares in BRL..........................................................................................................................8
6. Identifying the problems that would be faced by the organisation in BRL and the impact on the
BRL/USD..........................................................................................................................................10
7. Conclusion...................................................................................................................................11
References and Bibliography...........................................................................................................12
Appendix 1 – [Cash Flow with USD Loan]........................................................................................14
Appendix 2 – [Cash Flow with BRL Loan].........................................................................................17
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1. Introduction
The overall assessment aims in evaluating the project that has been presented to the
American company, which produces body care products. The project relatively evaluates the
opportunity for the American based organisation in South America. The Pretty Face
organisation can adequately invest in Brazil and create a subsidiary in the region to
accumulate high level of revenues in the long run. Moreover, the proposed project is
evaluated on the basis of currency exchange rate, loans, and other factors which need to be
understood by the management before commencing the Investments. Further evaluation
has been conducted on the possibility of fearful outcomes that might incur due to the
occurrence of a financial crisis.
2. Depicting the annual cash flows in BRL that would be remitted to United States
0 1 2 3 4 5
Demand 1,400,000.00 1,400,000.00 1,400,000.00 1,400,000.00 1,400,000.00
Price per unit 18.00 19.08 20.22 21.44 22.72
Total revenue (1 x 2) 25,200,000.00 26,712,000.00 28,314,720.00 30,013,603.20 31,814,419.39
Variable cost per unit 8.00 8.48 8.99 9.53 10.10
Total variable cost (1x4) 11,200,000.00 11,872,000.00 12,584,320.00 13,339,379.20 14,139,741.95
Annual lease expenses - - - - -
Other fixed costs 2,000,000.00 2,120,000.00 2,247,200.00 2,382,032.00 2,524,953.92
Noncash expenses (depreciation) 10,800,000.00 10,800,000.00 10,800,000.00 10,800,000.00 10,800,000.00
BRL interest expenses 2,940,000.00 2,940,000.00 2,940,000.00 2,940,000.00 2,940,000.00
Total expenses (5+6+7+8+9) 26,940,000.00 27,732,000.00 28,571,520.00 29,461,411.20 30,404,695.87
Before-tax earnings of subsidiary (3 - 10) 1,740,000.00- 1,020,000.00- 256,800.00- 552,192.00 1,409,723.52
Host government (BR) corporate tax - - - 138,048.00 352,430.88
Principal payment on BR debt - - - - 42,000,000.00
After-tax earnings of subsidiary (11 -12-13) 1,740,000.00- 1,020,000.00- 256,800.00- 414,144.00 40,942,707.36-
Net cash flow to subsidiary (14 + 8) 9,060,000.00 9,780,000.00 10,543,200.00 11,214,144.00 30,142,707.36-
BRL to be remitted by subsidiary 9,060,000.00 9,780,000.00 10,543,200.00 11,352,192.00 12,209,723.52
BRL acc. by reinvesting blocked funds - - - - 6,000,000.00
Withholding tax on remitted funds - - - 138,048.00 352,430.88
BRL to be remitted after witholding taxes 9,060,000.00 9,780,000.00 10,543,200.00 11,214,144.00 17,857,292.64
Salvage value - - - - 43,200,000.00
Capital gain taxes - - - - -
BRL to be remitted after capital gain taxes 9,060,000.00 9,780,000.00 10,543,200.00 11,214,144.00 61,057,292.64
Expected spot rate of BRL - - - - -
PV of parent cash flows 8,388,888.89 8,384,773.66 8,369,532.08 8,242,730.61 41,554,567.43
Initial investment by parent 42,000,000.00-
Cumulative NPV 42,000,000.00- 33,611,111.11- 25,226,337.45- 16,856,805.37- 8,614,074.75- 32,940,492.68
NPV 32,940,492.68
Year
The above table provides information regarding the overall cash flow of the
subsidiary company in Brazil over the period of 5 years. The table directly indicates that the
project would have a positive NPV value after conducting all the relevant expenses and
incomes over a period of time. After evaluating the relevant information such as Salvage
value, total income, total expenses and withholding tax remitted funds, the actual cash flow
of the subsidiary during the period of 5 years can be identified. This calculation has directly
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provided a positive NPV value, which states that the new subsidiary of Pretty Face
organisation would be a profitable endeavour. Nobes (2014) stated that investors by using
the NPV values is able to detect the financial viability of an investment under time value of
money, as it provides relevant information about the future cash flows in present times.
Moreover, the above cash flow directly provides all the relevant information about
the future cash flows that would be incurred in Brazil by the organisation. Moreover, the
above calculation does not have any kind of adjustments, as it directly ports the overall
income that would be generated in BRL. The cha flow directly involves all the relevant
truncations that would be conducted in brazil for accurately supporting its operations. The
cash flow calculation has directly indicated that all the relevant calculations of fixed cost and
variable cost is mainly evaluated to detect the actual cash inflow for the next financial years.
The overall initial investment that has been conducted by the parent company in Brazil is
used, as the initial cost, which is then subtracted during the calculation of the Net present
value. McLean and Zhao (2014) argued that investment appraisal techniques are only
helpful if the organisation has accurately analysed the project and determined the cash
flows that would be achieved in the long run.
3. Calculating the annual cash flow that Pretty face receive
3.1 Cash flow when subsidiary hedges BRL$8 million annual
0 1 2 3 4 5
BRL to be remitted after capital gain taxes 11,700,000.00 12,240,000.00 12,812,400.00 13,419,144.00 63,262,292.64
Hedged BRL cash flows to be remitted 8,000,000.00 8,000,000.00 8,000,000.00 8,000,000.00 8,000,000.00
Unhedged BRL cash flows to be remitt ed 3,700,000.00 4,240,000.00 4,812,400.00 5,419,144.00 55,262,292.64
Forward rate 0.30 0.30 0.27 0.27 0.25
Expected spot rate of BRL 0.30 0.28 0.27 0.25 0.23
Hedged cash flows to parent 3,510,000.00 3,672,000.00 3,459,348.00 3,623,168.88 15,815,573.16
Unhedged cash flows to parent (gains from hedging) - 220,320.00 63,037.01 279,450.99 997,982.40
US interest expenses 378,000.00 378,000.00 378,000.00 378,000.00 378,000.00
Principal payment on US debt - - - - 10,500,000.00
Total cash flow to parent (USD) 3,132,000.00 3,514,320.00 3,144,385.01 3,524,619.87 5,935,555.56
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
Year
The calculation conducted in the above table provides information regarding the BRL
$8 million hedge that would be conducted by the subsidiary company. From the relevant
evaluation, it can be identified that the total NPV value after conducting the hedging process
is at the levels of 2,439,417.37. The hedging process directly helps in reducing the risk
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exposure that was faced by the American company while transferring the money from its
subsidiary to its Parent company. Shenkar, Luo and Chi (2014) stated that the fluctuations in
the currency market directly affects the overall revenues of an MNC, as their overseas
revenues needs to be transferred to their home country.
The overall hedge measure is mainly used by detecting the expected rate and
forward rate of BRL/USD. This has mainly helped in understanding the level of income that
could be transferred to the US parent company from the initial investments. Therefore,
from the relevant evaluation, it has been detected that the fluctuations in the currency
market can be minimised by adequately utilising the forward rate contracts and hedge the
currency conversion exposure. Melvin and Norrbin (2017) mentioned that the use of
hedging provisions allows the multinational companies to reduce the risk in the currency
conversion risk and generate high level of income from operations. Therefore, the $8million
hedge provision would accurately reduce the risk involved in investment and maximise the
returns that would be generated from the current conversion.
3.2 Cash flow when no revenue is hedged
Year
0 1 2 3 4 5
PV of parent
cash flows
29,00,000
.00
26,35,185
.19
23,96,032
.58
21,79,891
.18
31,32,148.
59
Initial
investment by
parent
-
1,26,00,0
00.00
Cumulative
NPV
-
1,26,00,0
00.00
-
97,00,000
.00
-
70,64,814
.81
-
46,68,782
.24
-
24,88,891
.05
6,43,257.5
4
NPV
6,43,257.
54
The above table provides information on the overall cash flow and net present value
of the proposed project when no revenue has been hedged by the subsidiary company.
Therefore, if there is no hedge conducted by the subsidiary company then the overall NPV
value would be 643,257.54, while the hedged NPV value is at the levels of 2,439,417.37.
Thus, it could be identified that conducting the hedge would be more beneficial for the
Pretty Face organisation situated in America, as maximum of the revenues are lost during
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the conversion of BRL to USD. Hence, it is advisable that the subsidiary organisation initiates
the hedging transaction for maximising the NPV value and reduces the loss, which might
incur due to the currency conversion. Nobes (2014) indicated that without the use of
adequate hedging measure the risk factors of an organisation to increase exponentially,
where the currency conversion increases the losses, which could be incurred from the
transaction.
Hence, if the organisation does not use adequate hedging measure then the company
would not be able to reduce the risk. This has been witnessed in the above calculation,
where with the hedging measure the losses of the income was detected. The company’s
overall income degraded from the levels of 2,439,417.37 to 643,257.54, where a total
reduction in profits of the parent company is at the levels of 1,796,159.83.
4. Identifying the best option for Pretty face
4.1 Using the debt from US
0 1 2 3 4 5
BRL to be remitted after capital gain taxes 11,700,000.00 12,240,000.00 12,812,400.00 13,419,144.00 63,262,292.64
Hedged BRL cash flows to be remitted 8,000,000.00 8,000,000.00 8,000,000.00 8,000,000.00 8,000,000.00
Unhedged BRL cash flows to be remitt ed 3,700,000.00 4,240,000.00 4,812,400.00 5,419,144.00 55,262,292.64
Forward rate 0.30 0.30 0.27 0.27 0.25
Expected spot rate of BRL 0.30 0.28 0.27 0.25 0.23
Hedged cash flows to parent 3,510,000.00 3,672,000.00 3,459,348.00 3,623,168.88 15,815,573.16
Unhedged cash flows to parent (gains from hedging) - 220,320.00 63,037.01 279,450.99 997,982.40
US interest expenses 378,000.00 378,000.00 378,000.00 378,000.00 378,000.00
Principal payment on US debt - - - - 10,500,000.00
Total cash flow to parent (USD) 3,132,000.00 3,514,320.00 3,144,385.01 3,524,619.87 5,935,555.56
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
Year
The above table provides information regarding the NPV value of the subsidiary
project if the company takes loan from US. The total NPV value would be 2,439,417.37 if
loan were taken from USD, as interest and loan repayments need to be paid by the
organisation. McLean and Zhao (2014) mentioned that loan requirements force the
organisation to increase the level of cash outflows, which raises the level of expenses and
reduce the NPV value. The calculation also provides information on the overall changes in
values of the organisation, when the loan from US is used. The loan from US will require the
payment that could conducted in USD, which will then require the conversion of BRL to USD.
Therefore, the payments conducted in the USD would erode the benefits that is achieved by
the Brazilian subsidiary.
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4.2 Using the debt from BRL
0 1 2 3 4 5
BRL to be remitted after capital gain taxes 9,060,000.00 9,780,000.00 10,543,200.00 11,214,144.00 61,057,292.64
Hedged BRL cash flows to be remitted 8,000,000.00 8,000,000.00 8,000,000.00 8,000,000.00 8,000,000.00
Unhedged BRL cash flows to be remitt ed 1,060,000.00 1,780,000.00 2,543,200.00 3,214,144.00 53,057,292.64
Forward rate 0.30 0.30 0.27 0.27 0.25
Expected spot rate of BRL 0.30 0.28 0.27 0.25 0.23
Hedged cash flows to parent 2,718,000.00 2,934,000.00 2,846,664.00 3,027,818.88 15,264,323.16
Unhedged cash flows to parent (gains from hedging) - 176,040.00 51,872.54 233,532.31 963,197.84
US interest expenses - - - - -
Principal payment on US debt - - - - -
Total cash flow to parent (USD) 2,718,000.00 3,110,040.00 2,898,536.54 3,261,351.19 16,227,521.00
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
Year
The calculations provide information about the NPV value of the proposed project
for Pretty Face, if the loan is taken in Brazil rather than from United States. The total NPV
value for the loan in Brazil is calculated up to 8,325,345.06, which is relatively higher than
the previous NPV value. The calculation directly indicates that the loan would be taken in
Brazil where adequate interest would be paid throughout five years, while at the end of the
five year the overall loan will be repaid to the Brazilian Bank. This process would eventually
allow the subsidiary organisation to minimise the cost of capital adequately improving the
level of revenues that could be generated from operations. Therefore, it could be advisable
for the organisation in United States to take loan from the Brazilian Banka and not from US
banks, as they would be able to improve the level of income from operations. Melvin and
Norrbin (2017) mentioned that investment appraisal technique allow the organisation to
detect the overall income that could be generated from an investment, which helps the
management to detect most viable investment option that is available to the organisation.
5. Elaborating on the factors that is driving the difference between issuing the share in US
and Issuing shares in BRL
There is different level of factors that needs to be addressed by the US based
organisation while initiating the equity ratio in United States or Brazil for acquiring the
capital to support its new Endeavour. The issue of shares in Brazil wood directly increase
problems for the US based organisation, as there are relevant paper works that needs to be
submitted by the management for issuing the shares in the country. The Brazilian stock
exchange does not operate and evaluate shares is conducted by the United States Stock
Exchange. The US based organisations overall operations are in United States where is
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valuation would it directly allow the management to acquire the required for investment in
Brazil. however, issue in the shares in Brazil would not allowed the investors in the country
to identify the opportunity in the shares, as being a subsidiary the required capital would
not be acquired by the organisation. There are other factors that need to be evaluated by
the US based organisation, which is the risk free rate, market return, and the overall risk of
the organisation while issuing the relevant in Brazil. The Brazilian investors would not be
able to identify the investment opportunity in the subsidiary company, which will directly
reduce the efficiency of the share issue that needs to be conducted for initiating the project
in Brazil (Antras and Foley 2015).
However, the US based company could directly issue the shares in United States,
which would eventually allow the management to acquire the required level of capital to
support the proposed business project in Brazil. The risk free interest rate could be
identified as a major problem for the US based organisation, as Brazil has a relatively higher
interested than United States, which is used by investors for deriving the expected return of
a company. Therefore, issuing shares in Brazil would not enough at the US-based
organisation as they would have to provide higher returns for the capital. Nevertheless,
issuing the shares in United States would be beneficial for the US-based organisation.
Cheng, Ioannou and Serafeim (2014) mentioned that share issues is mainly conducted by
the investors for additional capital, which allow them to increase their revenues that in turn
raises the shareholders’ value in the long run.
Brazil Values
Rf 8.98%
Rm 11.33%
Beta 1.1
CAPM 11.57%
United States Values
Rf 2.29%
Rm 12.32%
Beta 0.6
CAPM 8.308%
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The above table provides information on the overall CAPM values of the organisation
in United States and Brazil. This risk factors in the United States would be low, as the US
organisation is established in the region and would ensure adequate returns to the
investors. This could mainly reduce the overall risk attributes of the investment, which in
turn could generate a CAPM value of 8.308%, where the risk-free rate in US is 2.29% for 10-
year bond and Market returns is 12.32%. Moreover, the overall CAPM value of the company
in Brazilian economy is at the level of 11.57%, where the risk-free rate is at 8.98%, while the
market return is 11.33% and beta is 1.1. The high beta is mainly estimated, as the
organisation is not present in Brazil and the share issue of the stock would eventually raise
risk for the company. Thus, in Brazil the overall expected return from CAPM is higher than
the values present in United States.
6. Identifying the problems that would be faced by the organisation in BRL and the impact
on the BRL/USD
Financial crisis is considered to be one of the major problems for organisation to
continue their operations in a normal environment. During the financial crisis, the
operational capability of the Brazilian subsidiary would directly reduce, as a whole capital
market will react to the economic meltdown. This would reduce the purchasing power of
the customers, which in turn will result in declining revenues for the Brazilian subsidiary.
Moreover, the financial crisis would also overall currency market where the revenues that
would be transferred to United States from Brazil could be wiped out due to the declining
currency value. Sunscreen is considered a luxurious while during financial crisis customers
would be interested in buying Essentials and Living out luxurious items. This could
negatively affect the overall income of the Brazilian subsidiary and in turn hamper the
revenues of the parent organisation. Picciotto and Mayne (2016) stated that the financial
crisis of 2008 initiated the bankruptcy frenzy in organisation that was not able to hold their
financial position due to the loss in revenue and high debt.
During the financial crisis the Brazilian subsidiary would Witness shortage of fund, as
the overall revenues would be dropping due to lack of demand. This is declining revenues
would limit the cash availability of the organisation which in turn would affect its
operations. Therefore, Brazilian subsidiary could adequately improvise my reducing their
overall expenses that is incurred in marketing and other administrative operations. This
directly reduced the unnecessary expenses that are not needed on the specific. Moreover,
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the Brazilian subsidiary should think of reducing the overall exposure all, as it would
minimise the finance cost and allow the organisation to maintain adequate cash flows. The
laying out of employees is necessary during an economic crisis, as the organisation could not
be able to hold the relevant cash for supporting its operations. Papadopoulos and Heslop
(2014) indicated that during the financial crisis investor uses short selling process, which can
be used by companies to minimise their risk exposure and control the damages to their
share value. During the financial crisis the subsidiary organisation needs to improve their
cash inflows, by reducing the cash outflows. The reduction in sales would directly have
negative impact on the company’s ability to support the finance cost, which increase the
possibility of their insolvency condition.
7. Conclusion
The assessment directly evaluates the investment option that is presented to Pretty
Face organisation by utilising adequate investment appraisal techniques. The project has
been evaluated on the basis of net present value for identifying whether the investment is
viable enough to allow the management generate high returns. The adequate use of
different circumstances has directly allowed the organisation to identify whether the
investment option is viable enough to generate adequate cash inflow in the long run. The
analysis has also been provided on the debt option, which can be used by the organisation
to improve its return. The analysis directly indicated that using the loan in Brazil would be
more beneficial Endeavour for the organisation, as it will reduce the cash outflows US bank.
Moreover, the equity issue needs to be conducted in United States, as it would allow the
parent company to acquire the required funds without any hassle and support the overall
project in Brazil. The impact of financial crisis is relatively problematic for all the
organisations engulfed in operations. Therefore, reduction in overall expenses would be
more beneficial for the Organisation in Brazil during the financial crisis as revenues and cash
flow would be declining due to the capital market meltdown.
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References and Bibliography
Ajami, R. and Goddard, J.G., 2014. International business: Theory and practice. Routledge.
Antras, P. and Foley, C.F., 2015. Poultry in motion: a study of international trade finance
practices. Journal of Political Economy, 123(4), pp.853-901.
Bräutigam, D. and Gallagher, K.P., 2014. Bartering Globalization: China's Commodity backed‐
Finance in Africa and Latin America. Global Policy, 5(3), pp.346-352.
Cavusgil, S.T., Knight, G., Riesenberger, J.R., Rammal, H.G. and Rose, E.L., 2014. International
business. Pearson Australia.
Cheng, B., Ioannou, I. and Serafeim, G., 2014. Corporate social responsibility and access to
finance. Strategic management journal, 35(1), pp.1-23.
Enqvist, J., Graham, M. and Nikkinen, J., 2014. The impact of working capital management
on firm profitability in different business cycles: Evidence from Finland. Research in
International Business and Finance, 32, pp.36-49.
Ferreira, M.P., Santos, J.C., de Almeida, M.I.R. and Reis, N.R., 2014. Mergers & acquisitions
research: A bibliometric study of top strategy and international business journals, 1980–
2010. Journal of Business Research, 67(12), pp.2550-2558.
Finney, A., 2014. The international film business: A market guide beyond Hollywood.
Routledge.
Forsgren, M. and Johanson, J., 2014. Managing networks in international business.
Routledge.
Gelsomino, L.M., Mangiaracina, R., Perego, A. and Tumino, A., 2016. Supply chain finance: a
literature review. International Journal of Physical Distribution & Logistics
Management, 46(4), pp.348-366.
Gelsomino, L.M., Mangiaracina, R., Perego, A. and Tumino, A., 2016. Supply chain finance: a
literature review. International Journal of Physical Distribution & Logistics
Management, 46(4), pp.348-366.
McLean, R.D. and Zhao, M., 2014. The business cycle, investor sentiment, and costly
external finance. The Journal of Finance, 69(3), pp.1377-1409.
Melvin, M. and Norrbin, S., 2017. International money and finance. Academic Press.
Müllner, J., 2017. International project finance: review and implications for international
finance and international business. Management Review Quarterly, 67(2), pp.97-133.
Nobes, C., 2014. International classification of financial reporting. Routledge.
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Papadopoulos, N. and Heslop, L.A., 2014. Product-country images: Impact and role in
international marketing. Routledge.
Picciotto, S. and Mayne, R. eds., 2016. Regulating international business: beyond
liberalization. Springer.
Shenkar, O., Luo, Y. and Chi, T., 2014. International business. Routledge.
Tian, X., 2016. Managing international business in China. Cambridge University Press.
Zingales, L., 2015. Presidential address: Does finance benefit society?. The Journal of
Finance, 70(4), pp.1327-1363.
1.
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Appendix 1 – [Cash Flow with USD Loan]
Year
0 1 2 3 4 5
Demand
14,00,00
0.00
14,00,00
0.00
14,00,00
0.00
14,00,00
0.00
14,00,000
.00
Price per unit 18.00 19.08 20.22 21.44 22.72
Total revenue (1 x 2)
2,52,00,0
00.00
2,67,12,0
00.00
2,83,14,7
20.00
3,00,13,6
03.20
3,18,14,4
19.39
Variable cost per unit 8.00 8.48 8.99 9.53 10.10
Total variable cost (1x4)
1,12,00,0
00.00
1,18,72,0
00.00
1,25,84,3
20.00
1,33,39,3
79.20
1,41,39,7
41.95
Annual lease expenses - - - - -
Other fixed costs
20,00,00
0.00
21,20,00
0.00
22,47,20
0.00
23,82,03
2.00
25,24,953
.92
Noncash expenses
(depreciation)
1,08,00,0
00.00
1,08,00,0
00.00
1,08,00,0
00.00
1,08,00,0
00.00
1,08,00,0
00.00
BRL interest expenses - - - - -
Total expenses (5+6+7+8+9)
2,40,00,0
00.00
2,47,92,0
00.00
2,56,31,5
20.00
2,65,21,4
11.20
2,74,64,6
95.87
Before-tax earnings of
subsidiary (3 - 10)
12,00,00
0.00
19,20,00
0.00
26,83,20
0.00
34,92,19
2.00
43,49,723
.52
Host government (BR)
corporate tax
3,00,000.
00
4,80,000.
00
6,70,800.
00
8,73,048.
00
10,87,430
.88
Principal payment on BR
debt - - - - -
After-tax earnings of
subsidiary (11 -12-13)
9,00,000.
00
14,40,00
0.00
20,12,40
0.00
26,19,14
4.00
32,62,292
.64
Net cash flow to subsidiary
(14 + 8)
1,17,00,0
00.00
1,22,40,0
00.00
1,28,12,4
00.00
1,34,19,1
44.00
1,40,62,2
92.64
BRL to be remitted by
subsidiary
1,20,00,0
00.00
1,27,20,0
00.00
1,34,83,2
00.00
1,42,92,1
92.00
1,51,49,7
23.52
BRL acc. by reinvesting
blocked funds - - - -
60,00,000
.00
Withholding tax on
remitted funds
3,0
0,000.00
4,8
0,000.00
6,7
0,800.00
8,7
3,048.00
10,8
7,430.88
14

RISK MANAGEMENT
BRL to be remitted after
witholding taxes
1,17,00,0
00.00
1,22,40,0
00.00
1,28,12,4
00.00
1,34,19,1
44.00
2,00,62,2
92.64
Salvage value - - - -
4,32,00,0
00.00
Capital gain taxes - - - - -
BRL to be remitted after
capital gain taxes
1,17,00,0
00.00
1,22,40,0
00.00
1,28,12,4
00.00
1,34,19,1
44.00
6,32,62,2
92.64
Expected spot rate of BRL 0.3000 0.2820 0.2651 0.2492 0.2342
Cash flows to parent (USD)
35,10,00
0.00
34,51,68
0.00
33,96,31
0.99
33,43,71
7.89
1,48,17,5
90.76
US interest expenses
3,78,000.
00
3,78,000.
00
3,78,000.
00
3,78,000.
00
3,78,000.
00
Principal payment on US
debt - - - -
98,37,436
.90
USD cash flows
31,32,00
0.00
30,73,68
0.00
30,18,31
0.99
29,65,71
7.89
46,02,153
.86
PV of parent cash flows
29,00,00
0.00
26,35,18
5.19
23,96,03
2.58
21,79,89
1.18
31,32,148
.59
Initial investment by parent
-
1,26,00,0
00.00
Cumulative NPV
-
1,26,00,0
00.00
-
97,00,00
0.00
-
70,64,81
4.81
-
46,68,78
2.24
-
24,88,89
1.05
6,43,257.
54
NPV
6,43,257.
54
Year
0 1 2 3 4 5
BRL to be remitted after
capital gain taxes
1,17,00,0
00.00
1,22,40,0
00.00
1,28,12,4
00.00
1,34,19,1
44.00
6,32,62,2
92.64
Hedged BRL cash flows to
be remitted
8,00,000.
00
8,00,000.
00
8,00,000.
00
8,00,000.
00
8,00,000.
00
Unhedged BRL cash flows to
be remitted
1,09,00,0
00.00
1,14,40,0
00.00
1,20,12,4
00.00
1,26,19,1
44.00
6,24,62,2
92.64
Forward rate
15

RISK MANAGEMENT
0.30 0.30 0.27 0.27 0.25
Expected spot rate of BRL 0.30 0.28 0.27 0.25 0.23
Hedged cash flows to
parent
35,10,00
0.00
36,72,00
0.00
34,59,34
8.00
36,23,16
8.88
1,58,15,5
73.16
Unhedged cash flows to
parent (gains from hedging) -
2,20,320.
00
63,037.0
1
2,79,450.
99
9,97,982.
40
US interest expenses
3,78,000.
00
3,78,000.
00
3,78,000.
00
3,78,000.
00
3,78,000.
00
Principal payment on US
debt - - - -
1,05,00,0
00.00
Total cash flow to parent
(USD)
31,32,00
0.00
35,14,32
0.00
31,44,38
5.01
35,24,61
9.87
59,35,555
.56
PV of parent cash flows
29,00,00
0.00
30,12,96
2.96
24,96,11
4.20
25,90,70
0.82
40,39,639
.38
Initial investment by parent
-
1,26,00,0
00.00
Cumulative NPV
-
1,26,00,0
00.00
-
97,00,00
0.00
-
66,87,03
7.04
-
41,90,92
2.84
-
16,00,22
2.02
24,39,417
.37
NPV
24,39,41
7.37
16

RISK MANAGEMENT
Appendix 2 – [Cash Flow with BRL Loan]
Year
0 1 2 3 4 5
Demand
14,00,00
0.00
14,00,00
0.00
14,00,00
0.00
14,00,00
0.00
14,00,000
.00
Price per unit 18.00 19.08 20.22 21.44 22.72
Total revenue (1 x 2)
2,52,00,0
00.00
2,67,12,0
00.00
2,83,14,7
20.00
3,00,13,6
03.20
3,18,14,4
19.39
Variable cost per unit 8.00 8.48 8.99 9.53 10.10
Total variable cost (1x4)
1,12,00,0
00.00
1,18,72,0
00.00
1,25,84,3
20.00
1,33,39,3
79.20
1,41,39,7
41.95
Annual lease expenses - - - - -
Other fixed costs
20,00,00
0.00
21,20,00
0.00
22,47,20
0.00
23,82,03
2.00
25,24,953
.92
Noncash expenses
(depreciation)
1,08,00,0
00.00
1,08,00,0
00.00
1,08,00,0
00.00
1,08,00,0
00.00
1,08,00,0
00.00
BRL interest expenses
29,40,00
0.00
29,40,00
0.00
29,40,00
0.00
29,40,00
0.00
29,40,000
.00
Total expenses (5+6+7+8+9)
2,69,40,0
00.00
2,77,32,0
00.00
2,85,71,5
20.00
2,94,61,4
11.20
3,04,04,6
95.87
Before-tax earnings of
subsidiary (3 - 10)
-
17,40,00
0.00
-
10,20,00
0.00
-
2,56,800.
00
5,52,192.
00
14,09,723
.52
Host government (BR)
corporate tax - - -
1,38,048.
00
3,52,430.
88
Principal payment on BR
debt - - - -
4,20,00,0
00.00
After-tax earnings of
subsidiary (11 -12-13)
-
17,40,00
0.00
-
10,20,00
0.00
-
2,56,800.
00
4,14,144.
00
-
4,09,42,7
07.36
Net cash flow to subsidiary
(14 + 8)
90,60,00
0.00
97,80,00
0.00
1,05,43,2
00.00
1,12,14,1
44.00
-
3,01,42,7
07.36
BRL to be remitted by
subsidiary
90,60,00
0.00
97,80,00
0.00
1,05,43,2
00.00
1,13,52,1
92.00
1,22,09,7
23.52
BRL acc. by reinvesting
blocked funds - - - -
60,00,000
.00
17

RISK MANAGEMENT
Withholding tax on
remitted funds - - -
1,3
8,048.00
3,5
2,430.88
BRL to be remitted after
witholding taxes
90,60,00
0.00
97,80,00
0.00
1,05,43,2
00.00
1,12,14,1
44.00
1,78,57,2
92.64
Salvage value - - - -
4,32,00,0
00.00
Capital gain taxes - - - - -
BRL to be remitted after
capital gain taxes
90,60,00
0.00
97,80,00
0.00
1,05,43,2
00.00
1,12,14,1
44.00
6,10,57,2
92.64
Expected spot rate of BRL 0.3000 0.2820 0.2651 0.2492 0.2342
Cash flows to parent (USD)
27,18,00
0.00
27,57,96
0.00
27,94,79
1.46
27,94,28
6.57
1,43,01,1
25.32
US interest expenses - - - - -
Principal payment on US
debt - - - - -
USD cash flows
27,18,00
0.00
27,57,96
0.00
27,94,79
1.46
27,94,28
6.57
1,43,01,1
25.32
PV of parent cash flows
25,16,66
6.67
23,64,50
6.17
22,18,59
5.56
20,53,88
4.05
97,33,105
.59
Initial investment by parent
-
1,26,00,0
00.00
Cumulative NPV
-
1,26,00,0
00.00
-
1,00,83,3
33.33
-
77,18,82
7.16
-
55,00,23
1.60
-
34,46,34
7.55
62,86,758
.04
NPV
62,86,75
8.04
Year
0 1 2 3 4 5
BRL to be remitted after
capital gain taxes
90,60,00
0.00
97,80,00
0.00
1,05,43,2
00.00
1,12,14,1
44.00
6,10,57,2
92.64
Hedged BRL cash flows to
be remitted
8,00,000.
00
8,00,000.
00
8,00,000.
00
8,00,000.
00
8,00,000.
00
Unhedged BRL cash flows to
be remitted
82,60,00
0.00
89,80,00
0.00
97,43,20
0.00
1,04,14,1
44.00
6,02,57,2
92.64
Forward rate
18

RISK MANAGEMENT
0.30 0.30 0.27 0.27 0.25
Expected spot rate of BRL 0.30 0.28 0.27 0.25 0.23
Hedged cash flows to
parent
27,18,00
0.00
29,34,00
0.00
28,46,66
4.00
30,27,81
8.88
1,52,64,3
23.16
Unhedged cash flows to
parent (gains from hedging) -
1,76,040.
00
51,872.5
4
2,33,532.
31
9,63,197.
84
US interest expenses - - - - -
Principal payment on US
debt - - - - -
Total cash flow to parent
(USD)
27,18,00
0.00
31,10,04
0.00
28,98,53
6.54
32,61,35
1.19
1,62,27,5
21.00
PV of parent cash flows
25,16,66
6.67
26,66,35
8.02
23,00,95
1.76
23,97,19
0.48
1,10,44,1
78.12
Initial investment by parent
-
1,26,00,0
00.00
Cumulative NPV
-
1,26,00,0
00.00
-
1,00,83,3
33.33
-
74,16,97
5.31
-
51,16,02
3.55
-
27,18,83
3.07
83,25,345
.06
NPV
83,25,34
5.06
19