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GENERAL MOTORS BLUE MACAW BRAZIL
Plant X-Brazil Analysis
Finance 570: Group Project
Presented By: Abhijit Joshi, Kate Urpsirisuk, and Matthew Smith.

Company Background

 Headquartered in Detroit, MI (NYSC: GM)  CEOs – John F. Smith: Nov 1992 – May 2000 – Richard Wagoner: Jun 2000 – Present  Founded in 1908  Annual global industry sales leader for 76 years  Manufacturing facilities in 33 Countries

Brazil’s Improving Economy

 Plano Real (1994) intended to stabilize Brazilian economy  Prior to 1994, Brazilian inflation reached 2,490%, but leveled off and stood at only 4.3% in 1997  From 1994 through 1997, Brazils GDP grew by 88%  1997 Per Capita GDP was at R$10,080

Plant X – Brazil Venture
 “Blue macaw” : GM’s Brazilian experiment to build low cost car.  Plant – X : $310 Million manufacturing plant in southern Brazil.  Innovative Manufacturing : • Costs expected to be reduced by 30% - 35% of traditional manufacturing • Produce cars with fraction of the normal capital required • Suppliers manufacture parts and assemble the car onsite

Reasons For “PLANT - X”

 Brazil’s Economic Growth  Brazil’s Auto Market has exploded in recent years – Demand expected to hit 3 Million in 2000 from existing level of 1.7 Million in 1997.  “Popular Car” : Small low cost cars with 1Lt engine dominate Brazil’s auto market

Predicted Demand for Macaw

800
700 600 500 400 300 200 100 1999 2000 2001 2002 2003

Units ( thousands)

Brazil Demand Argentina Demand Chile Demand

SWOT Analysis

Strengths
Brand Image Strong Industry knowledge Financially Robust

Weaknesses
Large Investment Required  US Imported Engines (higher cost, Brazil tariff)

Low Manufacturing Cost
Risk Sharing Favorable financing terms

VW’s dominance in auto market
“Blue Macaw” (NOT a proven manufacturing method)

SWOT Analysis

Opportunities
Access to Emerging Markets
(Brazil, Argentina, and Chile) New Manufacturing technique Strong Sales Forecast Low Cost Leadership

Threats
Fierce Competition
Unfavorable Tax Treatment Short track record of currency stability Unpredictable government policies

Issues - Importance / Urgency Matrix

Importance
Urgency
1.

Low
Transfer Pricing 1. 2.

High
Reliance on suppliers Rising manufacturing costs due to inflation Currency Hedging “Blue Macaw” Project’s Financial Viability

Low

1.

High

2.

Issue

To analyze the Financial Viability of GM’s Plant-X to justify the firm’s large investment

Financial Viability Cause And Effect

Taxes

Inflation Rates, Exchange Rates

WACC (Hurdle Rate)

Project’s Financial Viability

Exchange Rate Pass - Through

Manufacturing Costs

Market Growth / Market Share

Decision Making Criteria

1. Payback Period – Must be under 5 years
2. Net Present Value (NPV) – Positive NPV 3. Internal Rate of Return (IRR) – IRR greater than the GM defined hurdle rate

Cash Flow Calculation

1. Prepare Income Statement 2. Add back non-cash items (Depreciation) 3. Reserve for 1.5% target cash level 4. 20% Parent company’s dividend

Net Income and FCF
$600
$505 $521

$500 $400
$395

Millions (R$)

$305

$300 $200 $100
$181

$311

$288

Net Income Free Cash Flows $167

$208 $144

$1999 2000 2001 2002 2003

Capital Asset Pricing Model (CAPM)

Ke = rf + β(rm-rf) Ke = 12.84% Where: rf = 0.07 rm = 0.143 β = 0.8

WACC Ko = (1-L) Ke + L id (1-t)
Pretax Rate of Return Debt Equity 7.40% After-tax Rate of Return 4.81% 12.84% Weight 0.35 0.65 GM’s WACC International Premium

WACC 0.016835 0.08346 10.03% 6%

Plant X’s WACC

16.03%

Payback Period

5 4

5

Years

3
2 1 0
Regular Payback Period Discounted Payback Period Hurdle Period

1.9

2.1

Net Present Value (NPV)

Discount Rate (Hurdle Rate) Initial Investment

• 16.03%
• R$ 290 M
• R$ 426,643,525

NPV
IRR

• 63.954%

Sensitivity Analysis of Demand

GM Forecast Demand...
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