FIN 3340 Module 6 Final Project: Marketing Deck Ovens in Chile, an International Finance Analysis Example

Bread, Pesos and a Service Center: An International Finance Plan for Raritan Hearth Ovens in Chile

Student Name

B.S.B.A. in Finance, Thomas Edison State University

FIN-3340: International Finance

Mentor Name

Month Day, Year

Bread, Pesos and a Service Center: An International Finance Plan for Raritan Hearth Ovens in Chile

1. The Product and the Market

Raritan builds stone-deck ovens that give artisan bread its crust, sold to independent bakeries and bakery chains. Chile is an attractive market: bread is central to Chilean diets and the country is known for unusually high bread consumption, its bakery sector is modernizing toward artisan and premium products and its economy is among the most stable in Latin America, with an investment-grade sovereign rating and a long-standing inflation-targeting central bank. The United States-Chile Free Trade Agreement, in force since 2004, allows the ovens to enter largely duty-free (Eiteman et al., 2022). The main competitors are Italian and German oven makers, which have long served the market. Froot et al. (1993) argue that hedging is valuable when outside financing is costly, which applies to a small exporter expanding abroad.

The choice of Chile also reflects the course's emphasis on matching a product to a country's financial environment as well as its demand. A first international venture is easier in a market with a convertible currency, a deep banking system and reliable courts, because each of those reduces the cost of managing currency risk, collecting payments and enforcing contracts. Chile offers all three, which lets the analysis focus on the currency and investment questions the course teaches rather than on survival in an unstable market.

2. Country and Currency Environment

3. Currency Management

Raritan will invoice large chain orders in pesos to compete with European rivals and hedge each signed order with a forward contract or, when it has access to peso borrowing, a money market hedge, which produce the same result under interest rate parity. For its first order, CLP 1.14 billion due in 180 days, a forward at 964.87 pesos per dollar locks in $1,181,503. Smaller orders from independent bakeries will be invoiced in dollars. Operating exposure, the risk that a lasting peso decline makes the ovens uncompetitive, will be managed by building peso-denominated costs in Chile, the main purpose of the service center below.

Operating exposure needs a different response from transaction exposure. Hedging a signed order protects one payment, but a lasting fall in the peso would make every future Chilean sale worth fewer dollars and could make Raritan's ovens less competitive against European rivals pricing in euros. The longer-term defenses are operational: buying some components and services in pesos, so that costs and revenues move together, and keeping pricing flexible so the company can share currency moves with customers.

4. Trade Financing

For export sales to new customers, Raritan will require payment by an irrevocable letter of credit confirmed by a U.S. bank, which substitutes the bank's credit for the buyer's and ensures payment once shipping documents are presented. For repeat customers with established records, it will move to documentary collections or open account terms backed by export credit insurance, which lowers costs for the buyer. EXIM, the U.S. export credit agency, can guarantee working capital loans and insure foreign receivables for a small exporter.

5. Entry Mode

The eclectic paradigm of Dunning (1988) explains when firms invest abroad rather than export: when they have an ownership advantage, the location offers benefits and internalizing the activity is better than contracting it out. Raritan's ownership advantage is its oven design; Chile's location advantage is a growing market and access to neighboring countries; and internalization matters because installation and service quality protect its reputation. Exporting alone would leave service to a distributor, whose incentives may differ. A Chilean assembly and service center, assembling ovens from shipped components and servicing the installed base, would capture the service margin, cut delivery times, build peso costs and let Raritan sell into Peru and Argentina later.

6. Capital Budgeting: The Assembly and Service Center

Eiteman et al. (2022) ask for two views of any foreign project: the local one, on peso cash flows, and the parent's, on the dollars that can come home after tax and conversion. Here the project is attractive locally, and remains attractive to the parent after withholding, though with a lower value. Even if the peso weakens far faster than inflation differences predict, the parent NPV stays positive, which reflects the center's peso costs offsetting part of the currency effect.

7. Financing

Financing follows Module 5: about 40 percent peso debt, borrowed locally or swapped from dollars so liabilities match the center's peso assets, and 60 percent Raritan equity. The 8.68 percent dollar cost of capital, including a 1 percent country risk premium, is the hurdle rate used above.

Political risk insurance is worth considering for the equity stake. U.S. government and private insurers offer coverage against expropriation and currency inconvertibility, and although Chile's record makes those events unlikely, the premium for a modest investment is small relative to the loss it would cover. The decision can be revisited once the center is operating and the company has a clearer view of its exposure.

8. Risks and Mitigation

The main risks are a sharp peso decline, slower bakery modernization than expected, competitive responses from European makers and policy changes affecting taxes. Raritan will hedge signed orders, keep a share of costs in pesos, phase the center's investment, starting with service before assembly, and use arbitration clauses in all contracts.

9. Recommendation

Raritan should enter Chile first through exports financed with confirmed letters of credit and hedged with forwards, and within 12 to 18 months open the assembly and service center, which adds value from both the project and parent perspectives and reduces operating exposure. The center should be financed mainly in pesos and evaluated each year against its cash remitted to the parent.

The recommendation is sequenced to keep options open. Exporting first tests demand with little capital at risk; the assembly and service center follows only if orders reach the level assumed in the capital budget; and each stage gives Raritan more information about the market before the next commitment. That staged approach is the practical form of the course's lesson that international investment decisions should account for the value of waiting and learning.

References

Dunning, J. H. (1988). The eclectic paradigm of international production: A restatement and some possible extensions. Journal of International Business Studies, 19(1), 1-31. https://doi.org/10.1057/palgrave.jibs.8490372

Eiteman, D. K., Stonehill, A. I., & Moffett, M. H. (2022). Multinational business finance (16th ed.). Pearson.

Froot, K. A., Scharfstein, D. S., & Stein, J. C. (1993). Risk management: Coordinating corporate investment and financing policies. Journal of Finance, 48(5), 1629-1658. https://doi.org/10.1111/j.1540-6261.1993.tb05123.x