Question

1.       Brazil is proposing a project that will increase cocoa beans production in the Amazonas Region of the country. Brazil is a net exporter of cocoa beans. One of the inputs to be used is fertilizer. Brazil, a net importer of pesticides, will be importing the pesticides.

Assume the following:

-Average FOB price of pesticides from a US port is US$6 per litre

-Assume freight, insurance and unloading (FIU) cost at Belem in Brazil is 5% of the FOB price

-Assume landing and port charges at Belem in Brazil is 5% of the CIF price

-Assume local transport and marketing costs for pesticides to relevant market is BRL 0.50 per litre

-Assume primary marketing cost (retail level) is BRL 0.25 per litre of pesticides

-Assume storage cost is BRL 0.25 per litre of pesticides

-Pesticides imported into Brazil are subject to 10% tariff

-The exchange rate is US$1 = BRL 1.8 (Where BRL is Brazilian currency)

-The opportunity cost of foreign exchange in Brazil is 10% higher than the official exchange rate

Answer the following:

a)      What is the CIF price in Brazilian currency using the official exchange rate

b)      What is the domestic market price (wholesale price) of pesticides

c)      What is the shadow exchange rate

d)     Determine the appropriate price for the economic evaluation of the project

e)      What is the appropriate price for the financial project evaluation

Answer 1

a)	The Calculation of CIF Price in Brazilian Currency using the official exchange rate is BRL 11.34 per litre
	FOB PRICE			$6.00
	CIF PRICE	FOB price plus 5%		$0.30
				$6.30
	Conversion in Brazilian currency			11.34
	($ 1 = BRL 1.8)
b)	The domestic market price (wholesale price) of pestisides is BRL 15.10per litre
	landing cost (excluding import duty)			11.34
	opportunity cost 10% higher			1.134
				12.474
	import duty 10% on tariff			1.2474
	port landing & port charges 5% of CIF			0.6237
	local transport & Marketing cost 0.50			0.5
	Storage			0.25
				15.10