Factories stopped layoffs followed In February 2015 the Venezuelan government

Factories stopped layoffs followed in february 2015

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their products. Factories stopped, layoffs followed. In February 2015 the Venezuelan government announced once again a “new” currency exchange system. The new system was little different, however, from the old three-tiered system in effect. There is the official exchange rate of roughly 6.3 bolivars to the U.S. dollar. But outside of food and medical purchases, few companies had access to this rate. The second- or middle-tier rate, called SICAD 1, a rate that was offered to select companies, was 12 bolivars. The third-tier rate, SICAD 2, theoretically open to all who needed it, was hovering around 52. A fourth, the black market rate, was trading at 190 bolivars per dollar. Regardless of the next exchange rate system or next devaluation, multinational firms from all over the world continued to write down their Venezuelan investments. This included Coca Cola (U.S.),
Telefonica (Spain) and drugmaker Bayer (Germany). So what was the value of investing or doing business in Venezuela tomorrow? Adjusting Discount Rates. The first method is to treat all foreign risk as a single problem, by adjusting the discount rate applicable to foreign projects relative to the rate used for domestic projects to reflect the greater foreign exchange risk, political risk, agency costs, asymmetric information, and other uncertainties perceived in foreign operations. However, adjusting the discount rate applied to a foreign project’s cash flow to reflect these uncertainties does not penalize net present value in proportion either to the actual amount at risk or to possible variations in the nature of that risk over time. Combining all risks into a single discount rate may thus cause us to discard much information about the uncertainties of the future. In the case of foreign exchange risk, changes in exchange rates have a potential effect on future cash flows because of operating exposure. The direction of the effect, however, can either decrease or increase net cash inflows, depending on where the products are sold and where inputs are sourced. To increase the discount rate applicable to a foreign project on the assumption that the foreign currency might depreciate more than expected, is to ignore the possible favorable effect of a foreign currency depreciation on the project’s competitive position. Increased sales volume might more than offset a lower value of the local currency. Such an increase in the discount rate also ignores the possibility that the foreign currency may appreciate (two-sided risk). Adjusting Cash Flows. In the second method, we incorporate foreign risks in adjustments to forecasted cash flows of the project. The discount rate for the foreign project is risk-adjusted only for overall business and financial risk, in the same manner as for domestic projects. Simulation-based assessment utilizes scenario development to estimate cash flows to the parent arising from the project over time under different alternative economic futures.

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