Professional Documents
Culture Documents
MBA (EVENING)
Case Solution on
3P TurboCross Border Investment in Brazil
Submitted to
Dr. M. Sadiqul Islam
Professor, Department of Finance, University of Dhaka
Prepared by
AQEEBUR RAHIM 32050
MAZHARUL ISLAM 32035
MD. SAIFUR RAHMAN 32053
Date of Submission
10th April, 2017
Letter of Transmittal
Dear Sir,
We are pleased to present this Case Solution on 3P TurboCross Border Investment in Brazil.
This is to inform you that we have successfully completed the Case Solution.
Working on this Case Solution has been really interesting & informative experience for us. We
learned many unidentified facts which we believe will be supportive to our academic &
professional career in the future. We have enjoyed working on this and we hope that our Case
Solution will meet the level of your expectations. We would try our best and shall be obliged to
provide you with any clarification regarding the Case Solution.
Sincerely,
1
ACKNOWLEDGEMENT
Firstly, we would like to thank the Almighty Allah for giving us the strength, the patience, and the
knowledge to do this Case Solution on 3P TurboCross Border Investment in Brazil. We would
also like to take this ultimate opportunity with pleasure to thank our course instructor, Professor,
Dr. M. Sadiqul Islam, for giving us the opportunity to do the Case Solution. He has been very
helpful to us throughout the entire process and has always been there to help us heartily even
through his hard times.
Moreover, we would also like to thank the people who helped out in providing solution to every
problem through discussion, without any faulty. We really appreciate even the minor sacrifice they
made in doing that. Without their efforts, it would have been impossible for us to finish this Case
Solution at such convenience. We would also like to thank our friends and family members for
showing us their support and help us in every possible ways throughout the entire work process.
With presence in every aspect, completing this task seemed as festive and interesting as ever.
2
Table of Contents
3
CHAPTER 1
INTRODUCTION
In modern day, Turbochargers are used in cars to improve the fuel efficiency of the engines.
Though in the past, Turbochargers were somewhat of a luxury product, used for mainly street
racing and in high performance cars only. Nowadays it is an essential part of a car which increases
the average mileage and enhances the fuel burning capacity of the cars. That is why the overall
Jason Park, the founder of such Turbocharger manufacturing company- 3P-Turbo, was
considering to establish another turbocharger manufacturing unit in Brazil. At that time, the
country was going through some political turmoil and many of the renowned politicians were
accused in the Petrobras scandal, including the president of the country, Dilma Rousseff. It was
also aligned with the countrys worst economic recession in the last twenty years, with
unemployment rate rising more than 10 percent and overall growth of the economy decreasing in
However, trade agreements like Mercosur makes a country with a rich history in manufacturing
cars like Brazil, much more attractive to foreign car manufacturers to open up new units which
would enable them to reach cross border markets of South America with zero tariff.
As an aspiring investor, Jason is considering a market forecast from a financial specialist to decide
whether he should proceed opening a new unit in Brazil or will the investment be too much risky
Now, the main objective of this paper is to determine whether Jason should go for the investment
now or wait for a year until a new elected government takes control or look somewhere else with
4
INTRODUCTION OF THE COMPANY
aftermarket turbochargers. The name 3P stands for powerful, precise and high performance which
the company claims to deliver in its product lines. The company was founded by Jason stacks, who
is considering an investment for opening a new manufacturing unit in Brazil. Apart from high
performing superchargers, the company produces fuel injectors, waste gates and heat exchangers.
It also has a wide range of SKUs. Because of the wide range of quality products, 3P-Turbo was
performance had increased the demand for 3P-Turbo products countrywide. The firm now pledges
to start a new operation in Brazil, the 9th largest manufacturer of cars in the world. The fuel saving
efficiency of 3P-Turbo made turbochargers would help them capture the auto market of the 5th
5
CHAPTER-2
Brazils economy was in a spot of bother during the mid-2016 time and had its worst economic
crisis in last 20 years. As a result, the growth rate suffered tremendously from 7.5 percent in 2010
to 3.7 percent in 2015 and budget deficit rose to 10.5 percent of the GDP by 2015. However, the
inflation rate decreased as the unemployment rate increased over 10 percent. Although a few years
back the economy was in a healthier position with President Cordoso guiding the countrys
economy to be a more sustainable one and overcoming the age old problem of hyperinflation. Even
his successor President Lula also maintained a pro-business environment by implementing well-
thought out fiscal and social policies. A decrease in the poverty rate with over 50 percent of the
population upgraded to the middle class fragment, it was also one of the reason of Brazils
economic boom during those years. But after his tenure ended, his successor, President Rousseff
took over and implemented a more of an interventional approach in her fiscal policies. She
increased the government expenditure by increasing the public funding of the Development Bank
of Brazil. The Bank gave out huge loans to the large corporations and totally abandoned the private
sector lending resulting a total abandonment of the fiscal policies that her previous presidents
maintained. Moreover, the central bank lowered the interest rate to pursue more investment and as
a result income level rose as well as the inflation. To maintain the inflation appreciation, Rouseff
subsidies, as a result the government expenditure increased more creating a larger budget deficit.
The policy backfired as the burden increased and the growth rate took a big hit, losing almost 0.5
percent of growth per year. Although the central bank increased the interest rates after the policy
backfired, but it had a little to no effect as the inflation rate would still be above 9 percent. By mid-
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2016, political turmoil added more imbalance to the economy which was already facing a
recession. Scandals like Petrobras also added to the economic turmoil as some of the renowned
politicians were accused of taking bribes from contractors to provide them with overpriced deals
and in the process increasing the burden of the budget deficit. This budget deficit was one of the
The interim president, Temer has made his intentions clear of reducing the huge budget deficit by
appointing new dynamic cabinet members, slowly abolishing the intervening methods that his
previous president started and restore the growth of the economy with a low inflation rate. It was
assumed that a change in the then government officials would bring a positive effect in the
economy. The possible replacements of the former president Rousseff, were known to be business
friendly and are capable of turning things around the Brazilian economy. Many of the foreign firms
were refraining themselves investing until 2018, after the presidential elections takes place and a
capable person take over the government duties and make a positive impact to the economy.
The change in the government had a very adverse effect in the economy of Brazil. A high inflation
rate means a devalued currency against foreign currencies. The foreign investors will have less
profit after they convert their Brazilian Real into their own currency. With poor infrastructure, high
tax burden in a developing country like Brazil, a high inflation would certainly repel foreign
investors from setting up manufacturing units costing millions of dollars. But even though the
economy was suffering with an inflation rate over 9 percent and unemployment rate over 10
percent, the auto industry had a great potential to flourish as the Brazilian government was trying
to promote the domestic auto manufacturing market. The Brazilian government had a trade
agreement with its neighboring South American countries for trading freely among them with zero
7
tariff benefit. The agreement known as Mercosul, was more effective for the growth of an auto
manufacturing sector because of the tariff imposed on the foreign auto imports to make the
domestic market more attractive to the foreign investors. So, domestic investors would gain access
in almost all member nations of Mercosul, without costing any tariff. Investing in those
environment with a market size of a continent is really tempting for foreign investors, yet the
overall economic and political climate is forcing them to stay away from investing.
With President Temer taking over the hot seat up until the 2018 presidential election, many market
specialists predicted that he will be able to deliver some positive outcome. The policies that he
decided to implement before the economy gets anymore worse, were to reduce the budget deficit
by lowering the inflation rate. Eventually the inflation rate declined in the third quarter of 2016
coming down from 8.97 to 8.48. In fact, this is the lowest inflation rate recorded since October
2015. So, President Temers policy to scale back Rousseffs intervention policy did have a positive
The next few years are one of the most important period in Brazilian history as a lot of
transformation will take place in the economy. The 2018 presidential election would shape up the
countrys economic future and answer a lot of question of the investors mind. Whether the
economy will continue its abysmal performance in the upcoming year or will there be a growth
oriented environment. There are some speculations about some possible candidates for the
president position including the governor of Sao Paolo, Geraldo Ackmin and Aecio Neves, who
already participated in the previous election but lost to former president Rousseff.
After the previous governments dismal approval rating, the new government would want to
change that and try to maintain a higher approval rating. As we already discussed that the economy
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was already in a recessionary phase. So, the unemployment is supposedly increased and a huge
portion of the economy would be in need of work. The government would want to create some
more job availabilities by encouraging investors to open new manufacturing units in Brazil. For
that the government will try to relax on some of its policies; like a rebate in the tax rate for a
specific period of time (something that the previous government also did).
Reviewing the data of the inflation rate for the past few months, the inflation rate is declining as
the interim government of President Temer, took some steps to reverse the causes for which it
increased in the first place. If this continues, we can assume that the inflation rate will be kept at
9
CHAPTER 3
The automobile Industry is one of the most important sources of the GDP for Brazil and their
economy is very much rely on it. Brazils economy has slowed down because of political problems
in 2015 and 2016 years. As all the measures of the economy like the growth rate plummeting and
inflation rate, unemployment rate rising over the last few years, this economic down fall had big
influence on the automobile market of Brazil. As a result, in 2015 Brazils annual car sales fell
26.5% compared to the previous years, which was the worst annual decline since 1987. And in
2016, the situation became even worse with the rate plummeting to 20.2%. (Source: Forbes)
As the market conditions are favorable and there are no or few turbocharger manufacturer, so 3P-
Turbo has a lot of potential in Brazilian auto industry. The impact of economic recession may be
high in the car business, but in turbo chargers market it will have a less impact. Turbo chargers
makes the engine more efficient and keeps the environment cleaner. So it will become more
popular to the car owners. The change in the economy has an impact in every industry of the
Some of the key analysis of the overall auto industry of Brazil is stated in the following portion.
PORTERS 5 FORCES
The porters 5 forces model discusses about the nature of the competition 3P-Turbo will face in the
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IV. Bargaining power of suppliers (high)
Threat of new entrants refers to the threat new competitors pose to existing competitors in an
industry. If 3P turbo enters into the market of Brazil, they will be a threat for the existing producers
of turbocharger there. As the reputation of 3P-Turbo is widely known and their product quality is
quiet good, it can be said that they can be a fierce competition for the existing competitors. But
after they become successful, more competitors will join as well. If any firm from the member
countries of Mercosur (Mercado Comn Del Sur) wants to enter the industry, they will have a
competitive advantage as the tax system and labor laws are pretty strict and burdensome in Brazil.
11
The new entrants will have competitive advantage over 3P-Turbo as they are producing in another
Threat of substitutes
As Brazil is trying to go green and be environment friendly, turbochargers could certainly add
value to that cause. Compare to normal fuel engines, turbo chargers can burn fuel more efficiently.
But consumers can be reluctant to use a special product just for that cause as the price of
turbochargers are somewhat high. There are some alternative options for the consumers like
electricity driven cars, other alternative fuel driven vehicles etc. These substitutes can be a threat
in the long run, when there will be more growing consciousness among consumers to purchase
The auto parts industry can be very much price sensitive at time. Even though 3P turbo produces
quality turbochargers, nonetheless, it is still an optional product to make the engine more efficient.
If 3P turbo charges price too high, consumers might be reluctant to pay a high amount to buy their
product. Moreover, over firms may also provide turbochargers at a cheaper price, which can also
In an open market economy, sellers are not obliged to one single customer. In case of Brazil, 3P-
Turbo will have to convince the suppliers for a fair price for the spare parts, to keep themselves
more competitive in the market. 3P-Turbo is currently operating in the US territory. So, when they
will start operating in Brazil, the cost of supplies may increase due to the sheer distance of those
two countries. Suppliers can have a bargaining option in this situation as they r operating in a
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Rivalry among the competitors
3P turbo is growing very well and they have expanded dramatically over the years. They have a
wide variety of products with thousands of SKUs for customers to choose from. They had
manufactured award winning turbochargers for race cars and with the superior product quality, 3P
good after the foundation in 1992 but still have less market share to compete the toppers. But it is
expected that they can be in the competition with any large company in future if they continue this
growth rate.
PESTEL ANALYSIS
decisions.
13
Political Factors
For the last few years, situation in Brazil is unfavorable for business because of political
instability. It became worse with the government involvement in the corruption scandal involving
Petrobras and people demanded the former president Dilma Rousseff to be either resigned or to be
impeached. Later in 2016 she was impeached by the vote and the vice president Michel Temer
replaced her and become the president. In 2017 there is less chance to the situation to be better
Economic Factors
The economic factors are not showing Brazil to be much friendly for business as well. Political
problems cause economic instability in Brazil. GDP growth rate was declined by 3.8 and 3.6
percent in 2015 and 2016 respectively while unemployment increased by 10.2 percent in that time
and unemployed people was more than ten million. By 2014, 35 million people who emerged from
poverty in the decade but in last 2 years, 10 percent of them have fallen back down to the ladder
again.
Social Factors
In Brazil, social factors seemed to be unfavorable to business. The gap between rich and poor is
higher than many countries. The richest 10% of people in Brazil have access to over 40% of the
countrys income. On the other hand, the poorest 10% receive about 1% of the income. Also Brazil
is burdened with lots of crime. As the poverty and unemployment rate is going up, crime is
increasing in Brazil. The mass media is constantly full with the news of crime in this country
include mugging, robbing, kidnapping and gang violence around the Brazil where police is unable
to deal with them. For that reason, criminal have little respect for police and therefore, the Ministry
14
of Justice created the National Public Security Force to handle major emergencies and crisis
Technological Factors
Compared to the developed country, technological infrastructure is weaker in Brazil. But they have
achieved a significant position in the international market in the last decades. In 2016, Brazil was
fourth in production of vehicle. They produced 1,778,464 cars and 377,892 commercial vehicles
As the turbocharger is an optional part of car, the sale of car and the possibility for turbocharger
Environmental Factors
There are huge forests and trees including Amazon rainforest in Brazil and their environment have
been very well although deforestation and illegal poaching have been major problems. The
government is putting much effort to save the environment by planning to cut the emission of
carbon up to 37% by 2025. Using turbocharger will be environment friendly as it increases the
15
Legal Factors
Brazil government increased the tariff on imports of car and car parts. This tax is applicable for
the all countries except custom union, Mercosur which went into effect in 1995. As Brazil was the
full member of Mercosur, they imposed a Common External Tariff for the countries who are not
the members of the union. For this reason they developed in the locally manufactured car and car
parts and became one of the top manufacturers of cars in the world.
SWOT ANALYSIS
SWOT analysis is a framework that analyzes external factors Strength and Weakness and internal
Strength
Strength is the internal positive factors that an organization leads an organization towards its
goal and objectives and helps to sustain in competitive market. 3P Turbo has the following
strengths:
Their turbochargers are compatible to every vehicle, from cars to pickup trucks.
They provide full technical support for every single product they sell.
Their product variety with thousands of SKUs for customers to choose from.
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Weakness
Weakness is the negative internal factors that an organization needed to overcome to prevent any
Their products are optional products which are not mandatory. So even if
customers get used to them, in case economy faces any problem, the sale will be
Opportunities
Opportunities are the external positive factors that company can turn into advantage and generate
Wide range of product lines to grab the market share, which are high performance
Their products are environment friendly as it makes the engine more efficient. So
In Brazil, they will have tax facility as they are manufacturing car parts.
With the regulatory pressure and consumers love of power and economy in their
Threats
Threats are the external negative factors that can cause trouble and hamper company profit. The
With the fuel efficiency of turbocharger, some analysts claimed that turbochargers
17
If the political and economic problems are not sorted out, they might face crisis of
RATIO ANALYSIS
Return on Asset: Return on asset shows how profitable a company is related to its total assets. It
indicates how efficiently the company is utilizing to make profit. It shows the efficiency of utilizing asset
to make profit, so the higher it is the better.
Here, with desired capital structure and with maximum debt, Return on asset is 13.20%. It means that
company will be generating 13.2 BRL by utilizing asset of 100 BRL.
Return on Equity: Return on equity indicated how efficiently a company is generating profit with their
money from shareholders. It shows the efficiency of utilizing the equity, so the higher it is the better.
In this case, Return on equity with desirable capital structure is 26.40% and with maximum debt is
42.90%. That means the company will be generating 26.4 BRL with the desirable capital structure and
42.9 BRL with maximum debt by utilizing 100 BRL of equity. In the second situation, debt is more and
total capital is also more which brings more profit. But after paying those extra debt holders, the profit
is more than desirable capital structure.
Profit Margin: Profit margin shows at what percentage the company is generating profit from their sales.
So it doesnt consider the capital structure and whatever the debt-equity ratio is, profit margin will be
same. It shows the profit percentage of sales, so the higher it is the better.
Here, in both situations profit margin is 25.54% which means by selling 100 BRL, the company is going to
make 25.54 BRL profit.
Fixed Asset Turnover Ratio: Fixed asset turnover ratio measures how efficiently the company utilizes
their fixed assets to generate sales. As it shows the efficiency of utilizing asset, so the higher it is the
better.
In the both situations, fixed asset turnover ratio is 67.20% which means company will be generating 67.2
BRL net sales by using 100 BRL of fixed assets.
Total Asset Turnover Ratio: Total asset turnover ratio measures how efficiently the company utilizes
their total assets to generate sales. As it shows the efficiency of utilizing asset, so the higher it is the
better.
In the both situations, total asset turnover ratio is 51.69% which means company will be generating
51.69 BRL net sales by using 100 BRL of total asset.
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CHAPTER 4
The International Country Risk Guide (ICRG) rating comprises 22 variables in three subcategories
of risk which are: political, financial, and economic. A separate index has been created for each of
the subcategories. The political risk rating contributes 50% of the composite rating, while the
financial and economic risk ratings each contribute 25%. The Political Risk index is calculated
based on 100 points, Financial Risk on 50 points, and Economic Risk on 50 points.
The following formula is used to calculate the aggregate political, financial and economic risk:
POLITICAL RISK
Brazil is recently going through some significant changes in their political environment. So, for
determining the points for this section, we had to carefully examine the past, present and the
probable future political environment of Brazil. The political risk is calculated in the following
context:
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Legislative Strength 4 3
Popular Support 4 2
12 8
Socioeconomic Unemployment 4 1
conditions
Consumer 4 2
Confidence
Poverty 4 2
12 5
Investment Profile Contract Viability 4 3
Profit Repatriation 4 3
Payment Delays 4 1
12 7
Internal Conflict Civil War 4 3
Terrorism/Political 4 1
Violence
Civil Disorder 4 2
12 9
External Conflict War 4 4
Cross-Border 4 4
Conflict
Foreign Pressure 4 3
12 11
Corruption 6 2 2
Military in Politics 6 5 5
Religious Tension 6 5 5
Law and Order Law(Judicial 3 2
System)
Order(Crime rate) 3 1
6 3
Ethic Tension 6 4
Democratic 6 4
Accountability
Bureaucracy 4 2
Quality
100 65
So, the total political risk is about 61 out of 100
ECONOMIC RISK
The recent political trouble has created an economic imbalance as well. Brazils economy in the
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recent past was plummeting as price of commodities were in a rise and people losing their jobs.
There were many key factors to consider while determining the economic risk of the country. The
FINANCIAL RISK
21
COMPOSITE POLITICAL, FINANCIAL AND ECONOMICAL RISK RATINGS
So, from the above calculation, we can find the composite political, economic and financial risk
rating of Brazil.
=0.5 (65+30+35.5)
=65.3
PROBLEM STATEMENT
1. Why would 3P Turbo consider investing in Brazil? What are the advantages and
2. What discount rate would we use to discount the cash flows from the project? Does this
3. Based on the five-year life of the project, does this project look attractive for 3P Turbo?
Should Jason invest now, while the Brazilian real was still relatively weak and his
competition was unlikely even to consider Brazil, or should he wait it out until after the
election in 2018?
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CHAPTER 5
3P Turbo has a significant competitive advantage of a good business relation with its vendor in
German. The vendor is willing to provide credit facility up to R$ 90 million at 2% interest.
However, taking full loan facility will make the companys debt ration very high which will
consequently make 3P Turbos financial risk very high. The desired capital structure is 1:1 Debt-
Equity ratio. On the other hand, 3P Turbos cost of equity capital in USA is 10%. We have
estimated the cost of equity for Brazil operation adjusting the relative inflation as following:
Cost of Equity
There are four options available for 3P Turbo to take loan from. We have calculated after tax cost
of debt for all options.
Cost of Debt
After estimating cost of debt and equity we have estimated WACC based on the desired capital
structure and for the highest debt to equity ratio.
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MODEL-1: (Maximum Debt)
Total 130000000 1
WACC 6.36%
Total 130000000 1
WACC 9.51%
The information given in this case suggests us that, 3P Turbo will prefer MODEL-2. Thus we
calculated the other terms on the basis of Model-2.
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If 3P Turbo go for 50-50 debt-equity ratio while financing this project, this will yield 16.13%
internal rate of return when MIRR will 14.0% assuming that the reinvestment rate is 10.0%.
This project will add value to the company by R$ 27,048.620 or $ 7,232,250 in terms of USD.
If 3P Turbo go for maximum debt financing its NPV increases to R$ 43,039,250 or US$
11,504,820. We have assumed that 3P Turbo will be able to exchange the cashflows into US$ in
forward exchange rate of 3.74 for R$/$.
25
Graph-1 NPV Frequency
From the above graph we can see that there is a 95% probability that the NPV will be in between
R$ 14,716,930 and R$ 40,509,930.
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The simulation shows that NPV is highly sensitive with WACC, which is -46.9%. The relaitonship
is inverse. NPV is also sensitive with Price per unit and production cost at 31.9% and -14%
respectively which is shown in Graph-2. This implies that NPV will increase by 31.9% of increase
in Price and decline by 14% of increase in production cost.
Trials 50,000
Mean 27,222.92
Median 27,089.29
Mode '---
Variance 43,553,882.70
Skewness 0.1292
Kurtosis 3.02
Minimum 2,386.26
Maximum 59,394.86
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Graph-3: IRR Frequency
The above graph shows the normal distribution of IRR in Monte Carlo Simulation for 50000 trials
at 100% certainty level.
There is a 95% probability that the IRR will be in between 13.95% and 18.29%.
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Graph-6: IRR Sensitivity
The simulation shows that IRR is highly sensitive with price growth. When price rises, IRR also
rises by 54.9% of the rise of price per unit. IRR is also sensitive with production cost by -31.6%
which implies that IRR will decrease by 31.6% of the increament in the production cost.
Trials 50,000
Base Case 16.13%
Mean 16.12%
Median 16.13%
Mode '---
Standard Deviation 1.11%
Variance 0.01%
Skewness -0.0172
Kurtosis 2.93
Coeff. of Variation 0.0687
Minimum 11.45%
Maximum 20.32%
Mean Std. Error 0.00%
29
Graph-7: MIRR Frequency
The above graph shows the normal distribution of MIRR in Monte Carlo Simulation for 50000
trials at 100% certainty level.
30
From the Monte Carlo Simulation, we can say that there is 95% probabilty that the MIRR will be
in between 12.57% to 15.40%.
Trials 50,000
Mean 13.99%
Median 14.00%
Mode '---
Variance 0.01%
Skewness -0.0280
Kurtosis 2.97
Minimum 10.96%
Maximum 16.63%
We also run Monte Carlo Simulation for the other optioin with maximum debt financing.
31
Graph-8: NPV Frequency
32
From above graph we can say that there is a 95% probability that the project will generate a NPV
in between RS$ 30,948,390 and R$ 55,925,250.
The simulation shows that NPV is highly sensitive with price, which is 43.5%. The relaitonship
is positive which indicates NPV will increase by 43.5% of the increment in price. NPV is also
sensitive with WACC and production cost by -29.1% and -18.0% respectively which is shown in
the above graph. This implies that NPV will decrease by 29.1% of increase in WACC and
decline by 18% of increase in production cost.
Table: Statistic Forecast values for NPV:
Trials 50,000
Mean 43,156.18
Median 43,080.87
33
Mode '---
Variance 40,942,636.11
Skewness 0.1081
Kurtosis 3.01
Minimum 19,399.83
Maximum 73,773.21
There is a 95% probability that the IRR will be in between 13.95% and 18.30%.
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Graph-12: Sensitivity of IRR
The simulation shows that IRR is highly sensitive with price growth. When price rises, IRR also
rises by 54.7% of the rise of price per unit. IRR is also sensitive with production cost by -31.5%
which implies that IRR will decrease by 31.5% of the increment in the production cost.
Statistic Forecast values for IRR
Trials 50,000
Mean 16.13%
Median 16.13%
Mode '---
Variance 0.01%
35
Skewness -0.0149
Kurtosis 2.97
Minimum 10.84%
Maximum 20.57%
There is a 95% probability that the MIRR will be in between 12.60% and 18.38%.
36
Graph-12: Sensitivity of MIRR
The simulation shows that IRR is highly sensitive with price growth. When price rises, IRR also
rises by 60.5% of the rise of price per unit. IRR is also sensitive with production cost by -26.0%
which implies that IRR will decrease by 26% of the increment in the production cost.
MEAN 14.00%
MEDIAN 14.00%
MODE '---
VARIANCE 0.01%
37
SKEWNESS -0.0234
KURTOSIS 2.96
MINIMUM 11.08%
MAXIMUM 16.97%
CHAPTER 6
ALTERNATIVE COURSES OF ACTION
Real options exist when managers can influence the risk of a projects cash flows by taking
different actions during the projects life in response to changing market conditions. As discussed
earlier, the economy and the industry in Brazil has a real option for 3P Turbo. We assumed that,
it will require additional investment of R$130 million. It is expected that the benefits can be
realized for 5 years. And the firm can exercise the real option within 3 years. We calculated the
value of real option at 9.51% discount rate with a risk free rate of 2.38% and expected (assumed)
returns and probabilities are as follows:
38
Probability PV of Return Variance
Inflows
0.1 107554058.72 -15.04% -1.50% 0.013256614
0.2 122918924.25 -2.91% -0.58% 0.011783657
0.4 153648655.32 21.37% 8.55% 1.2326E-33
0.2 184378386.38 45.64% 9.13% 0.011783657
0.1 199743251.91 57.78% 5.78% 0.013256614
SD 22.3787%
PV of 153648655.32
Expected
CF
39
RECOMMENDATION
The cost of capital is lowest if 3P Turbo take 90% seller financing from the Germen Vendor. The
NPV of the project is more than $11 million in that case. IRR and MIRR are also higher than the
The Monte-Carlo Simulation of this study demonstrated that the NPV, IRR and MIRR of this
Project are highly sensitive to Price per unit, Cost of Capital and Production Cost. So, the
reduction of risk of the project required to take appropriate action to maximize the production
A proper forecasting and timely use of real option add extra value as well increase the
profitability of a project. Again a true NPV always add value of real option. In this case, the
project may have an alternative real option; which is the possibility of establishing business
operation in Brazil. The calculation of real option results as the call option of R$ 43,352,740.33,
which means that establishing business in brazil will increase the NPV as well as benefit both for
From the above all assumptions, calculations and forecasts the project can be recommended as
an acceptable project. 3P Turbo should go for the project as it will add a value of $ 7,232,205
even without considering the value of real option. With consideration of real option it would be a
40