Nodal Logistics and CUSTO Brazil Harvard Case Solution & Analysis

Nodal Logistics and CUSTO Brazil Case Solution 

  • Discuss the following hedging methods assuming

(a) The exchange rate remains constant

(b) A 5% appreciation per year

(c) A 5% depreciation per year

Calculate for each alternative the present value of the hedged cash flows (NI + D) for the year 2009 – 2013 (see Exhibit 2) using a 10% discount rate.

The company, with the help of the above given hedging strategy, can minimize its risks to minimal.

Remain un-hedged

Project Year0123456
Calendar YearRATE2007200820092010201120122013
Net income 31212114599182489477648947764894776
Add: Depreciation 949,360949,360949,360949,360949,360
Cash Flows  4,070,5715,548,5425,844,1365,844,1365,844,136
  
Remain Unhedged 
 
a) the exchange rate remains constant 
Fixed BRL rate (BRL/$) 1.79501.79501.79501.79501.7950
Cash Flow proceeds (US $) 2267727.5773091109.7493255786.0723255786.0723255786.072
Baseline Present Value of the un-hedged Cash flow(US $)10% $11,307,659.64      

Forward contracts

Project Year0123456
Calendar YearRATE2007200820092010201120122013
Net income31212114599182489477648947764894776
Add: Depreciation949360949360949360949360949360
Cash Flows 40705715548542584413658441365844136
 
FORWARD CONTRACT        
Forward Rate (BRL/$)2.01412.14362.29792.45262.5
Cash Flow proceeds (US $)2021037.22588422.32543250.82382832.92337654.4
Present Value (US $)10%$8,966,286.87
% Difference from the Baseline Present Value (US $)-21%

Put options

Project Year0123456
Calendar YearRATE2007200820092010201120122013
Net income31212114599182489477648947764894776
Add: Depreciation949360949360949360949360949360
Cash Flows 40705715548542584413658441365844136
 
PUT OPTION
Put option strike rate (BRL/$)2.01412.14362.29792.45262.5000
Put option premium ($/BRL)0.04860.05910.0620.06360.0764
Cash flow exposure (BRL)40705715548542584413658441365844136
Put option premium ($, total)197829.7506327918.8322362336.432371687.0496446491.9904
Gross cash flow proceeds (US$)2021037.1882588422.282543250.792382832.9122337654.4
Less option premium (no interest)197829.7506327918.8322362336.432371687.0496446491.9904
Net cash flow proceeds (US$)1823207.4372260503.4482180914.362011145.8621891162.41
Present value @10%$7,712,101.96
% Difference from baseline-32%

CURRENCY ADJUSTMENT CLAUSE

Project Year0123456
Calendar YearRATE2007200820092010201120122013
Net income31212114599182489477648947764894776
Add: Depreciation949360949360949360949360949360
Cash Flows 40705715548542584413658441365844136
 
Currency Adjustment Clause 
 
b) a 5% appreciation per year5%
Expected BRL rate (BRL/$)95%1.79501.705251.619991.538991.462041.388941.31949
Cash Flow proceeds (US $) 25127183605318399725142076334429087
Present Value (US $)10%$13,891,069.03
% Difference from the Baseline Present Value (US $)  23%     
  
c) a 5% depreciation per year-5%
Expected BRL rate (BRL/$) 1.79501.884751.978992.077942.181832.290932.40547
Cash Flow proceeds (US $) 20568962670217267854325509942429518
Present Value (US $)10%$9,340,027.48
% Difference from the Baseline Present Value (US $)  -17%     

LOCAL CURRENCY DEBT FINANCING

Project Year0123456
Calendar YearRATE2007200820092010201120122013
EBIT4,106,8566,051,5556,440,4946,440,4946,440,494
Less: Interest Expense15%27000002700000270000027000002700000
EBT1,406,8563,351,5553,740,4943,740,4943,740,494
Tax24%337645.44804373.2897718.56897718.56897718.56
Net Income1,069,2112,547,1822,842,7752,842,7752,842,775
Add: Depreciation949,360949,360949,360949,360949,360
Cash Flows2,018,5713,496,5423,792,1353,792,1353,792,135
Fixed Exchange Rate1.79501.79501.79501.79501.7950
Cash flow Proceed 1124551.8441947934.152112610.2732112610.2732112610.273
Present Value10%$6,974,124.17
% Difference from the Baseline Present Value (US $)-38%
  1. Present a summary of the outcomes (present value) for the various hedging alternatives. Which among the various alternatives would you recommend? Explain your preference and also why not the other alternatives.

With the proper analysis of each of the above hedging alternative with their merits as well as demerits some conclusion can be made for Mr. John in order to minimize his risk efficiently in order to gain in the future....................

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