Description of the project
This project is all about conducting a feasibility study of starting a deep-sea fishing business in Mauritius for our US-based group. The country in question is an African island located on the South eastern side of the Indian Ocean (International business publication 20). Being an island country, it means that our group will benefit immensely if it starts its deep-sea fishing business in this country. However, to prove or disapprove this assumption, the group will conduct a feasibility study of the same. The intended business consists of buying ten boats of different sizes, hiring a captain and a mate for each boat and renting these boats to customers either on daily basis or on long term basis. The business is a competitive one because there are other companies in Boston doing the same business in Mauritius. For this reason, our group will set its rental prices based on the prevailing market conditions. In other words, the rental prices may change from time to time depending on the competition in the market.
In order to evaluate the practicability of the fishing business in Mauritius, the project starts by explaining the reasons that have informed our group’s decision to set up the business in Mauritius. After explaining these reasons, the project then proceeds to evaluating the underlying assumptions of the study as well as the issues that have been taken into account in the study. The last part of the project predicts the future exchange rates, determines the appropriate discount rates and presents the cash flows of the study. In addition, the last part of the project presents the calculations of the net present value for our business.
On the one hand, the group chose Mauritius because of the nature of the country and on the other hand, the group chose the country because of the nature of our business. In this case, the country is surrounded by the sea from every corner (IBP 20). This means that investing in fishing business in Mauritius will be an advantage to our group. This understanding has informed our group’s decision of choosing Mauritius rather than other African countries. The assumption is that the ocean surrounding the country will be a great resource to our business in terms of providing deep seas to our potential customers. By so doing, our business will thrive in Mauritius. The country’s strategic position on the Indian Ocean is also another reason that has informed our decision for choosing Mauritius rather than any other African country. Our group has established that Mauritius lies on the trade route of the Asian and African countries. This means that our potential customers will not only rely on the Mauritian market to sell their fish products, but they will also rely on other international market to sell their products. The rationale is that our business will thrive because our potential customers will hire our boats. Other factors that have informed our decision for choosing Mauritius relate to political stability in the country, the relatively stable economic growth and stable exchange rates (Ndulu 372).
Issues taken into account
In evaluating the practicability of doing business in Mauritius, this feasibility study has taken into account the following issues. First, the study has taken into account the political situations in the country. With regard to this issue, the study has established that past political differences in the country have in some instances led to political unrests. However, these political unrests have not had significant influences on the political stability the country has enjoyed since independence (Shillington 969). Our group understands the importance that political stability plays in stabilizing the exchange rates and business activities in the preferred country. In particular, our group understands that political instability in Mauritius would affect the future of our fishing business in the country. Our group also understands that political instability in Mauritius would affect trade regulations, tax system and labor laws in the country that would in return affect the our business activities in Mauritius (Shapiro and Sarin 317). For these reasons, our group has taken into account the political situation in the country before choosing to start its fishing business in Mauritius.
Second, the study has taken into account the indicators of economic growth in the country. This is in relation to the fact that underdevelopments in Mauritius would affect negatively our business practices. In comparison to other African countries, the study has established that Mauritius has for a long period experienced higher economic growth than other African countries in the neighborhood. This aspect is important in determining whether to start business in Mauritius or not because it indicates the financial capacity of consumers in Mauritius. Third, the study has taken into account the rate of inflation in the country. The study has done this because our group understands that adverse inflation rates would affect the exchange rate and our business practices in the country negatively (Shapiro and Sarin 320). With this understanding, the study has evaluated the past inflation rates in the country and the measures the government has taken to address them. In evaluating this issue, the study has established that the government has in the past regulated inflation rates through its central bank.
Assumptions regarding future business in Mauritius
While deciding to start the deep-sea fishing business in Mauritius, our group has presumed that political stability in the country will continue as it has been since independence. In other words, our group has presumed that the country will continue to hold elections after every five years as it has been doing since independence and that all the times the country will hold these elections, they will be peaceful. This assumption is based on the fact that the minor political unrests the country has experienced in the past due to political differences have not affected the country’s political stability (Soludo, Michael and Ha-Joon 192). For this reason, it is unlikely that political differences in the country in the future will affect the country’s politics that would in return affect business practices in the country. Our group has also presumed that the governments that will be in power at any given time will not change the trade regulations in the country. If anything, our group has presumed that incumbent governments might improve trade regulations rather than making them worse than they are today. The underlying reason for making this assumption is that incumbent governments in the country have in the past improved trade regulations rather than making them strict (Ndulu 371). At the same time, the country has been internationally recognized as one of the countries that uphold the rule of law. For this reason, it is unlikely that the change of government in Mauritius might affect foreign businesses in the country.
Assumptions regarding future exchange rate
Future exchange rates are affected by many factors ranging from market factors to governmental policies. For this reason, while setting up businesses in other countries, investors need to evaluate factors that might influence exchange rates that affect their end of the year profits. In our case, our group conducts its fishing business in Mauritius. This means at the end of every year the exchange rate of the Mauritian rupee and the US dollar will affect the profit of our group. In particular, given that the US dollar is stronger than the Mauritian rupee, a change in the exchange rate will affect the end of the year profit of our group. The most probable thing will be that our group will lose money at the end of every year because Mauritian rupee will probably lose value to the US dollar (Shapiro and Sarin 34). With respect to this understanding, our group has made the following assumptions regarding the future of the exchange rate of the US dollar and the Mauritian rupee.
First, our group presumes that Mauritian rupee will lose value rather than gain value in comparison to the US dollar. However, the change in the value of the Mauritian rupee will not be significant because the country has been able to maintain a relatively stable exchange rate in the past. Second, our group presumes that the exchange rate will remain relatively stable because the inflation rates in the country will remain relatively low, as they have been in the past. Third, our group presumes that the exchange rate will remain relatively stable in the future because political stability in the country will prevail (Mistry and Nikhil 33). Fourth, our group presumes that the government will not intervene in the market. Instead, the market will remain free of government’s intervention. Overall, our group presumes that the change in the exchange rates of the two currencies will remain relatively stable, as they have been in the past because the factors that affect them in the country will not change significantly.
Predicting the future exchange rates
In order to predict the future exchange rates for our group’s business, our group has utilized the purchasing power parity model. This model presumes that the price of a commodity would be the same throughout the world if the price of that commodity would be expressed in a single currency. The basic assumption is that a home currency should have the same purchasing power in every part of the world, and that only the inflation rate affects the purchasing power of a home currency (Shapiro and Sarin 94). In our case, our group has determined the price of its boats to be $4,950. With respect to this model only the inflation rate in the USA and Mauritius will affect the purchasing power of the two currencies and accordingly affect the future exchange rates.
Determining the future exchange rate using this model means determining the effect of the inflation rates in the two countries. Therefore, obtaining the 2013 inflation rates for the USA and Mauritius from the world fact book (CIA), our group determines the future exchange rates to be as it follows.
According to the CIA world fact book, the 2013 US inflation rate is 1.5 percent while that of Mauritius for the same period is 3.5 percent. This means that assuming that the price of the boats for our group is the same in the USA and Mauritius today, then the price of the same would increase at a higher rate in Mauritius within a period of one year than it would increase in the USA. For this reason, the future exchange rate for the two countries would change because of the differences in the inflation rates. In this case, the inflation differential between Mauritius and the USA would be
3.5% – 1.5% = 2%
The above inflation differential means that the price of our boats in Mauritius need to depreciate by 2% annually to keep the price of the boats relatively stable. Taking the current exchange rate for the two countries as 32 Mauritian rupees for one US dollar, then the future exchange rate would be as it follows.
(1 + 0.02) * (32 Mauritian rupee per US$1) = 32.64
This means that the exchange rate would change from 32 Mauritian rupees for one US dollar to 32.64 Mauritian rupees for one US dollar within a period of one year.
If the inflation rates for the two countries remain at 1.5% and 3.5%, then the exchange rate for the second, third and fourth years would be;
Second year (1 + 0.02) * (32.64 Mauritian rupee for US$1) = 33.29
Third year (1 + 0.02) * (33.29 Mauritian rupee for US$1) = 33.96
Fourth year (1 + 0.02) * (33.96 Mauritian rupee for US$1) = 34.64
Determination of the appropriate discount rate
In realization that our group cannot eliminate all the possible return variability in Mauritius though diversification, our group has utilized the beta formula to determine the appropriate discount rate for the project. In this case, the group intends to measure the systematic risks through beta. The formula below is a mathematical expression of beta.
Β = ρim σi/ σm
Where Β is the beta, ρim is the correlation between of the project’s returns, σi is the standard return’s deviation, σm is the standard return’s deviation on market portfolios (Shapiro and Sarin 416).
A positive correlation value will indicate that our business’ returns are moving in the same direction with the market returns. On the other hand, a negative correlation will demonstrate that our business’ returns are moving in the opposite direction with the market returns. As our group presumes, the political risks that our business might face in Mauritius may be eliminated through diversification. Suffice to say that even if political risks may be huge in Mauritius, they should not affect the discount rate of our group. The one notable thing with the discount rate of our group is that since our group will conduct its business in a developing country, our business might benefit immensely from diversification. This will be the case because the Mauritian economy may be less closely related to the American economy (Shapiro and Sarin 416). For this reason, our group may diversify its investment in Mauritius in the future in case it would face challenges investing in fishing business. This aspect acts as an added advantage to our group; thus, sets its discount rate at 4%.
Net present value (NPV)
Before determining the net present value of our group, it would be important to understand that this value will be the current value of future cash flows that our group will discount at the business’ cost of capital less initial cash outlay of our business.
The general formula of determining NPV is given below;
NPV = – Io + ∑ Xt / (1 + i)t ; t = 1, . . . n (Shapiro and Sarin 411)
Where Io is the initial cash investment for our group
Xt is the net cash flow at a certain period
i is the discount rate
t is time of investment
n is the maximum time of investment
In order to determine the NPV associated with our deep-sea fishing business, our group will start by determining the initial investment of our business. As indicated earlier on, our group intends to buy ten boats three big sized, three medium sized and four small sized boats. Each big sized boat costs $750; each medium sized boat costs $500 while each small sized boat costs $300. In total our group requires the following amount of money to purchase the boats.
3 * 750 = 2250
3 * 500 = 1500
4*300 = 1200
I.e. 2250 + 1500 + 1200 = 4950
Our group’s expectation is that this money will allow the group to make more money after a specified period. For this reason, our group has determined the appropriate period to evaluate the profitability of this business will be five years. After determining the appropriate time to evaluate the profitability of our business, the group has determined that the business will make the following investments for the five years. The group has presumed that the business will make $1500 for the first year, $1450 for the second year, $1400 for the third year, $1350 for the fourth year and $1300 for the fifth year. At the same time, the group has determined that the appropriate discount rate for this business will be 4% or (0.04).
The next step involves discounting the cash flows for our group. The general formula for discounting cash flows is
P = p/ (1 + i)t
Where p is the amount of cash flow
t is the time (in years)
i is the discount rate
For the first year: p = 1500/ (1 + 0.04)1 = 1442.308
For the second year p = 1450/ (1 + 0.04)2 = 1340.607
For the third year p = 1400/ (1 + 0.04)3 = 1244.595
For the fourth year p = 1350/ (1 + 0.04)4 = 1153.986
For the fifth year p = 1300/ (1 + 0.04)5 = 1068.505
At this point, our group will sum all its discounted cash flows and subtract its initial investment of $4950 to obtain the NPV
I.e. (1442.308 + 1340.607 + 1244.595 + 1153.986 + 1068.505) – 4950 = 1300.001
The positive NPV of our group’s investment indicates that it would be profitable for our group to invest in deep-sea fishing business in Mauritius because such a venture would be profitable (Shapiro and Sarin 411). In simple terms, the investment would earn our group a return of 4 percent annually as well as an additional profit of $1,300.001 on top of the $ percent annual profit.
The table below summarizes the cash flow
|Year||Cash flow||Present value (4%)||Present value||Cumulative present value|
|0||– 4950||1.0||– 4950||– 4950|
Bilson, John, and Marston Richard. Exchange Rate Theory and Practice. Chicago: University of Chicago Press, 1984. Internet resource.
International business publication (IBP). Mauritius investment and business guide. Washington: International business publication, 2002. Print.
Mistry, Percy, and Nikhil Treebhoohun. The Export of Tradeable Services in Mauritius: A Commonwealth Case Study in Economic Transformation. London: Commonwealth Secretariat, 2009. Print.
Ndulu, Benno. Country Case Studies. Cambridge: Cambridge Univ. Press, 2008. Print.
Shapiro, Alan, and Sarin Atulya. Foundations of multinational financial management. Danver: John Wiley & sons, Inc. 2009. Print.
Shillington, Kevin. Encyclopedia of African history. New York: Routledge, 2013. Print.
Soludo, Charles, Michael, Ogbu, and Ha-Joon Chang. The Politics of Trade and Industrial Policy in Africa: Forced Consensus? Trenton NJ: Africa World Press, 2004. Pri