Memo ICF - Dileep Warrier

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Apr 3, 2024

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Subject: Memo of Class 11 (International Project Valuation) Case: La Plage Bangladesh Upskilling Teammates: Priyank Kumar, Chaitali Pandit Date: November 28, 2021 Recommendation La Plage should not enter the Bangladeshi market for their manufacturing of apparel and accessories. Based on a cashflow and NPV analysis, we see that production within US yields a higher NPV over investing in 300 million Takas in Bangladesh for upskilling and continuing to manufacture there until 2024. Reasoning US Sourcing provides the best NPV ($2.06M) vs the Bangladesh scenario without upskill ($1.64M) and Bangladesh scenario with upskill ($744K). There are also certain risks associated such as inflationary pressures, operational complexity and exchange rate risks in going to a new country. There could also be added political risk beyond the 3 identified risks that hinder operation and productivity of foreign companies in Bangladesh. Process Firstly, the annual interest rate (discount rate) was calculated based on inflation of 6.5% between 2020 and 2024. Exchange rates have been calculated based on purchasing power parity into the future. The Taka discount rate of 12.76% has been calculated by taking the average of annual interest rates from 2020-2024. The final discount rate (USD) of 16.56% for sourcing in Bangladesh was calculated by adding the sovereign spread to the 12.76% (assuming added risk to do business overseas). For an inflation of 6.5%, the discount rate is 16.56% whereas for an inflation of 10% (2022 expected), the discount rate is 18.79%. Adding a sovereign spread lead to lower NPV of a scenario.

Alternate NPV approach : The main disadvantage of using this approach is that sovereign spread is not part of the calculation so it is overestimated (over optimistic). The real risks of exchange rate fluctuations need to be captured to be more prudent about this overseas scenario. NPV Calculation : Various scenarios were made for each of the risks – inflation, appreciation of the currency and discontinuation of operations in Bangladesh. The assumption was that operations would be discontinued and half the sales would be lost in 2022 and operations would resume in US during the second half of the year. The NPV for each alternative and scenarios were calculated. As mentioned, the NPV for US manufacturing was the highest followed by Bangladesh without upskill. Exhibit

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