One area in which you are assisting is in the setup of business development in Central and South America for Navigation Systems, Inc. (NSI). The firm has negotiated the framework of supplying $40 million per year (in U.S. dollars) in navigations systems for Auxiliary Aircraft in Brazil for 10 years. If the products are manufactured in the United States and delivered to Brazil, then there will be a 5% import tariff on $40 million in product. As an alternative, the Brazilian government has offered to pay for all costs associated with building and locating a manufacturing plant in Brazil to build the product. Auxiliary Aircraft would pay an additional 15%, making annual sales $46 million (in U.S. dollars), and no tariff would be levied.
Answer the following questions about this situation:
- Does any currency exchange rate risk exist? Why?
- What is a tariff? How is it implemented and collected?
Alsorespond to thevice president of business development's request for the following:
- the total amount of money NSI would receive from each scenario
- a report on what effect the Free Trade Agreement of the Americas (FTAA) or the possible regional integration, like Mercosur, would have on each scenario
- your thoughts about any other factors that would affect either scenario