Calculating Profitability: Asia vs LATAM Expansion

Which region would be more profitable for the company to expand, Asia or LATAM?

Based on the initial investments and expected future cash flows, which region shows a higher Net Present Value (NPV), Benefit Cost Ratio (BCR), and Internal Rate of Return (IRR)?

Analysis of Profitability

Expanding in LATAM appears to be more profitable. It has a positive NPV, a BCR greater than 1, and a slightly higher IRR compared to Asia.

Detailed Explanation

Calculating the Present Value (PV) of future cash flows involves discounting each cash flow by the discount rate over the 4 years and summing them up. The PV of the sum of future cash flows for the expansion in Asia is $424,352.45, and for LATAM, it is $330,810.29. This indicates that the present value of cash flows in LATAM is lower than in Asia.

The Net Present Value (NPV) is calculated by subtracting the initial investment from the PV of future cash flows. For the expansion in Asia, the NPV is -$75,647.55, while for LATAM, it is $5,810.29. A positive NPV indicates the project's profitability, and in this case, LATAM shows a positive NPV.

The Benefit Cost Ratio (BCR) is determined by dividing the PV of future cash flows by the initial investment. For Asia, the BCR is 0.85, indicating that the project may not generate sufficient returns. On the other hand, LATAM has a BCR of 1.02, which is greater than 1 and suggests profitability.

The Internal Rate of Return (IRR) is the discount rate that makes the NPV equal to zero. For the expansion in Asia, the IRR is approximately 9.5%, and for LATAM, it is approximately 9.1%. While the difference is slight, LATAM's IRR is slightly higher than Asia's.

Based on these calculations, expanding in LATAM appears to be more profitable for the company due to its positive NPV, BCR greater than 1, and slightly higher IRR compared to Asia.