Question Details

Describe the factors that PepsiCo likely considered 



1. PepsiCo- Project in Brazil. PepsiCo recently decided to invest more than $300 million for
expansion in Brazil. Brazil offers considerable potential because it has 150 million people and
their demand for soft drinks is increasing. However, the soft drink consumption is still only about
one-fifth of the soft drink consumption in the U.S. PepsiCo- initial outlay was used to purchase
three production plants and a distribution network of almost 1,000 trucks to distribute its products
to retail stores in Brazil. The expansion in Brazil was expected to make PepsiCo- products more
accessible to Brazilian consumers.
a. Given that PepsiCo- investment in Brazil was entirely in dollars, describe its exposure to
exchange rate risk resulting from the project. Explain how the size of the parent- initial
investment and the exchange rate risk would have been affected if PepsiCo had financed much
of the investment with loans from banks in Brazil.
b. Describe the factors that PepsiCo likely considered when estimating the future cash flows of
the project in Brazil.
c. What factors did PepsiCo likely consider in deriving its required rate of return on the project
in Brazil?
d. Describe the uncertainty that surrounds the estimate of future cash flows from the perspective
of the U.S. parent.
e. PepsiCo- parent was responsible for assessing the expansion in Brazil. Yet, PepsiCo already
had some existing operations in Brazil. When capital budgeting analysis was used to
determine the feasibility of this project, should the project have been assessed from a Brazil
perspective or a U.S. perspective? Explain.




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