Case 008

3P Turbo—Cross-
Border Investment in
Brazil

Group 62
 GROUP PROFILE

Group No

Jens Martensson
NAME ID NO

62
Shaikh Saifullah 23-2027
Khalid
Nusrat Jahan 23-2009

Md. Ullash Hossen 23-2227

2
COMPANY

Jens Martensson
PROFILE

3
COMPANY PROFILE
• Privately held turbocharger manufacturer based in the
United States was founded in 1992
• 3P Turbo manufactures powerful, precise and high
performing turbochargers for luxury and regular cars
• An ISO9001:2008 certified company for its quality building

Jens Martensson
and product performance
• Have businesses in many countries like: Brazil, Mexico and
so on

4
ECONOMY

Jens Martensson
ANALYSIS

5
ECONOMY ANALYSIS
• Brazil's economic and political condition seems highly
unfavorable for investment
• Economic growth rate declined by 3.8% and is expected to
fall continuously
• Inflation rate of the country is exceeding 10% and

Jens Martensson
unemployment rate is over 10%
• Political turmoil is taking place due to government’s
involvement in corruption scandal
• Economy has a good record to overcome economic
problems and achieve economic stability
• Central Bank’s interest is lowered to 7.25% to increase the
growth of the country
• Even with supportive govt. policies, the country is
experiencing low growth of 8%
6
INDUSTRY

Jens Martensson
ANALYSIS

7
PESTLE ANALYSIS

Social Technological Legal

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Political Economic Environmental
• Consumer’s • Regular • Reduction in fuel • Inovar Auto
• Regulatory • Economy is
preference for technological consumption by act for tax
pressure from volatile
high upgradation is 12% is incentives on
govt. • Low growth
performing needed to supported eco-based
• Increased rate with high • Environment
engines rule companies
tariff to 55% inflation affecting
• Customers' • Capable • ICMS tax and
• Import quota • Interventionist companies pay
prefer fuel workforce is exemption
on Mexico policies of govt. high tax rate
efficiency in needed for from it
• Technology's impact on product offering engines production
• Impact on cost structure in this industry

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Logo
Here
8
Porter’s Five Forces Analysis

Competitive
Rivalry-
Moderate

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Suppliers
Threat of
Bargaining
Substitutes-Low
Power- Low

Buyers
Threat of New
Bargaining
Entrants- Low
Power- Low
9
COMAPNY

Jens Martensson
ANALYSIS

10
SWOT ANALYSIS
WEAKNESSES
STRENGTHS
• Provides full technical support • High Capital Expenditure
for every single product it sold • High risk for future.
• Regulatory change

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• Superior product quality and
customer service
• ISO9001:2008-certified
company.

• Has opportunity to influence the

market.
• Slow adoption of alternative • Fast-mover advantage.
fuel vehicles. • Lower cost opportunity
• High operating costs.

THREATS OPPURTUNITIES
 Country Risk of Brazil

POLITICAL RISK COMPONENT(PR) 100 51.5

THE ECONOMIC RISK

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COMPONENTS(ER) 50 19.5
ASSESSING FINANCIAL RISK(FR) 50 23.5
Total = 0.5*(PR+ER+FR) 47

Country Risk is very high as composite risk is below 49 (USA’s country

risk 72.5 - lower)
 PROBLEM

Jens Martensson
STATEMENT

13
 PROBLEM
STATEMENT
Faced with uncompetitive regulation, the
➢ Should Jonson invest now or
founder of 3P Turbo, Jason Starks, was wait until the election in
contemplating setting up a facility to 2018?
manufacture automobile turbochargers in
Brazil. At that time, Brazil was experiencing ➢ Would 3P Turbo’s superior
huge political turmoil, resulting from the
Petrobras scandal that involved prominent
quality, high-performance
business and political leaders, and the turbochargers have a
impeachment of the country’s president,
Dilma Rousseff. It was also hit with the worst
competitive edge in Brazil?
recession in two decades, exacerbated by low ➢ Would entering Brazil during
commodity prices and the slow-down of the
Chinese economy. this turbulent time give 3P
Turbo first-mover advantage?
 Jens Martensson
ALTERNATIVE COURSES OF
ACTION

15
Scenarios

Investing at 3:1 D/E level borrowing 90

million Real

Investing at 1:1 D/E level borrowing 60 million

Jens Martensson
Real

100% internal funding use

Debt Issue from Unrestricted

Liquidation Valuation
Subsidiary
16
 Jens Martensson
ANALYSIS OF
ALTERNATIVES

17
Scenario 1: Borrowing 60 million BR from
German Vendors
• Average revenue and cost growth 9% (at Brazilian inflation
rate)
• Initial investment R$130 million

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• Tax rate 34%
• Depreciation 24 million per year
• Vendor subsidized interest cost 2%
• Swap exchange rate (R$/Euro) 4.20
• US cost of capital (Adjusted with country risk) 10%
• Brazilian cost of capital (country risk adjusted) 17.55%
• Spot rate (R$/$) 3.56
Borrowing 60 million BR from German Vendors
2016 2017 2018 2019 2020 2021
Total Operating Cash Flows (BR) 25716 28662.9 36468 43887 52413

Cost of building and equipment (BR) -120000

Cost of Training After Tax (BR) -6600

Salvage Value (BR) 30000

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Capital Gain Taxes (30%) (BR) -9000

Value of Cheap Financing 6,510

Total Free Cash Flow (BR) -120090 25716 28663 36468 43887 73413

Expected Future Exchange Rate 3.56 3.80 4.07 4.34 4.64 4.96
Total Free Cash Flow (US$) -33733 6760 7050 8394 9453 14798

Discounting US CF with US Cost of

Capital
IRR ($) 10.19%
NPV (US$000) $190.409 MIRR($) 10.12%
Less: Financial distress cost $1.904
Add: Real option $9342.98
Adjusted NPV (S) $9531.49
Borrowing 60 million from German Vendors

Jens Martensson
• Coefficient of variations 3.01
 Scenario 2: D/E Ratio 1:1
Borrowing 60 million Real from the German vendor

NPV (US$000) (419.136)

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Less: Financial distress cost (2.10)
Add: Real option 9342.98
Adjusted NPV ($) 8,925.94
IRR ($) 9.58%
MIRR($) 9.73%

Value of Cheap
Financing (BR) 4,340
Scenario 2: D/E Ratio 1:1

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• Coefficient of variations 0.649
 Scenario 3: 100% Internal Funding

NPV (US$000) (5,852.731)

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Less: Financial distress cost
Add: Real option 9342.98
Adjusted NPV ($) 3490.253
IRR (USD) 3.87%
MIRR(USD) 6.11%

• Price increase 6%
• Production, selling and administration cost increase
are 10%,9.5% and 11%
Scenario 3: 100% Equity Funding

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• Coefficient of variations 0.475
 Jens Martensson
RECOMMENDATION

25
 RECOMMENDATION & JUSTIFICATION

Scenarios Adjusted NPV MIRR CV

Jens Martensson
Borrow 90 million (D/E 3:1) 9531.49 10.12% 3.01
Borrow 60 million (D/E 1:1) 8925.944 9.73% 0.649
100% internal financing 3490.253 6.11% 0.475

✓ Hold the project until election

26
Thank
You
Appendix 1
Cost of capital

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28
Appendix 2
Estimating future exchange rates

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29
Appendix 3
Real Option Valuation
Time to expiration 3
Exercise price (X) 35561.79

Jens Martensson
Current price (S) 38155.38
Volatility (σ) 6.95%
risk free rate 7%
d1 2.38
d2 2.26
N(d1) 0.991
N(d2) 0.988
Call option value 9342.98 30