# 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 Year 0 1 2 3 4 5 6 Calendar Year RATE 2007 2008 2009 2010 2011 2012 2013 Net income 3121211 4599182 4894776 4894776 4894776 Add: Depreciation 949,360 949,360 949,360 949,360 949,360 Cash Flows 4,070,571 5,548,542 5,844,136 5,844,136 5,844,136 Remain Unhedged a) the exchange rate remains constant Fixed BRL rate (BRL/\$) 1.7950 1.7950 1.7950 1.7950 1.7950 Cash Flow proceeds (US \$) 2267727.577 3091109.749 3255786.072 3255786.072 3255786.072 Baseline Present Value of the un-hedged Cash flow(US \$) 10% \$11,307,659.64

Forward contracts

 Project Year 0 1 2 3 4 5 6 Calendar Year RATE 2007 2008 2009 2010 2011 2012 2013 Net income 3121211 4599182 4894776 4894776 4894776 Add: Depreciation 949360 949360 949360 949360 949360 Cash Flows 4070571 5548542 5844136 5844136 5844136 FORWARD CONTRACT Forward Rate (BRL/\$) 2.0141 2.1436 2.2979 2.4526 2.5 Cash Flow proceeds (US \$) 2021037.2 2588422.3 2543250.8 2382832.9 2337654.4 Present Value (US \$) 10% \$8,966,286.87 % Difference from the Baseline Present Value (US \$) -21%

Put options

 Project Year 0 1 2 3 4 5 6 Calendar Year RATE 2007 2008 2009 2010 2011 2012 2013 Net income 3121211 4599182 4894776 4894776 4894776 Add: Depreciation 949360 949360 949360 949360 949360 Cash Flows 4070571 5548542 5844136 5844136 5844136 PUT OPTION Put option strike rate (BRL/\$) 2.0141 2.1436 2.2979 2.4526 2.5000 Put option premium (\$/BRL) 0.0486 0.0591 0.062 0.0636 0.0764 Cash flow exposure (BRL) 4070571 5548542 5844136 5844136 5844136 Put option premium (\$, total) 197829.7506 327918.8322 362336.432 371687.0496 446491.9904 Gross cash flow proceeds (US\$) 2021037.188 2588422.28 2543250.79 2382832.912 2337654.4 Less option premium (no interest) 197829.7506 327918.8322 362336.432 371687.0496 446491.9904 Net cash flow proceeds (US\$) 1823207.437 2260503.448 2180914.36 2011145.862 1891162.41 Present value @ 10% \$7,712,101.96 % Difference from baseline -32%

 Project Year 0 1 2 3 4 5 6 Calendar Year RATE 2007 2008 2009 2010 2011 2012 2013 Net income 3121211 4599182 4894776 4894776 4894776 Add: Depreciation 949360 949360 949360 949360 949360 Cash Flows 4070571 5548542 5844136 5844136 5844136 Currency Adjustment Clause b) a 5% appreciation per year 5% Expected BRL rate (BRL/\$) 95% 1.7950 1.70525 1.61999 1.53899 1.46204 1.38894 1.31949 Cash Flow proceeds (US \$) 2512718 3605318 3997251 4207633 4429087 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/\$) 1.7950 1.88475 1.97899 2.07794 2.18183 2.29093 2.40547 Cash Flow proceeds (US \$) 2056896 2670217 2678543 2550994 2429518 Present Value (US \$) 10% \$9,340,027.48 % Difference from the Baseline Present Value (US \$) -17%

LOCAL CURRENCY DEBT FINANCING

 Project Year 0 1 2 3 4 5 6 Calendar Year RATE 2007 2008 2009 2010 2011 2012 2013 EBIT 4,106,856 6,051,555 6,440,494 6,440,494 6,440,494 Less: Interest Expense 15% 2700000 2700000 2700000 2700000 2700000 EBT 1,406,856 3,351,555 3,740,494 3,740,494 3,740,494 Tax 24% 337645.44 804373.2 897718.56 897718.56 897718.56 Net Income 1,069,211 2,547,182 2,842,775 2,842,775 2,842,775 Add: Depreciation 949,360 949,360 949,360 949,360 949,360 Cash Flows 2,018,571 3,496,542 3,792,135 3,792,135 3,792,135 Fixed Exchange Rate 1.7950 1.7950 1.7950 1.7950 1.7950 Cash flow Proceed 1124551.844 1947934.15 2112610.273 2112610.273 2112610.273 Present Value 10% \$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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