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.

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%

Currency adjustment clause with a 5% upper and lower bound, using the current spot rate as reference rate

 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%

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