Your employer, GBATT, headquartered in the United States of America, has decided to expand operations into Brazil. Although the decision to expand has been made, the CFO has asked for an analysis of the risks associated with the expansion. Your instructions are to analyze specific risks associated with building a manufacturing facility in Brazil. Include a description of each of the following types of risks and analyze their impact on the decision to build the new facility.
1. Exchange risks
2. Country risks
3. Political risks
For the expansion, GBATT is exploring which of two possible approaches to take for constructing a new manufacturing facility in Brazil. In addition to analyzing the risks associated with the expansion, you have been asked to provide analysis for selecting the best approach for the new facility. The following is the information the CFO provided to you to assist in your analysis.
GBATT’s current capital structure is:
· 60% equity and 40% debt.
· Stockholders require 6% return on their investment.
· Bondholders require a 3% return.
· The corporate tax rate is 35%.
GBATT has narrowed the choice between two facilities in two different parts of the country. Preliminary analysis has been completed and an estimate of the future net cash flows for each choice has been provided. The original cash flows were provided in U.S. dollars. Dollars are in thousands.
|
Year
|
Choice A
|
Choice B
|
|
0
|
($15,000)
|
(10,000)
|
|
1
|
2,000
|
1,500
|
|
2
|
5,000
|
4,000
|
|
3
|
6,000
|
5,000
|
|
4
|
6,000
|
5,000
|
|
5
|
4,000
|
3,000
|
After completing the risk analysis, use the information from the chart above to complete the following:
1. Calculate GBATT’s WACC.
2. Using the WACC and the above cash flows, calculate the NPV of each project.