JOINT VENTURE

Joint Venture

Joint Venture

Introduction

Joint venture is a collective business opportunity between two or more independently working parties. The activities of joint ventures involve the use of collective resources and assets for the performance of an agreed business of a terminal nature. In this respect, joint ventures differ from corporations. Each venturer in the joint venture maintains a separate head for individual inventory, and a separate property and equipment account (Campbell 2009 p. 44). In international ventures, however, venture activities might be carried out by one party and finance might come from the other party.

In the present case, PATCO is planning a venture investment in Cascamon - Industrial Madeireira. PATCO is investing equipment in the venture, and Cascamon is to oversee the operations of the venture. The venturers will share the profits in the pre-determined ratios. This paper first describes the case and proposals set forth by PATCO's management and then analyses the prospects of the venture keeping in light of theories and tools of international finance. The paper reviews the established proposal of the venture, the background of the companies, and the underlying assumptions. Possibilities where the project might/might not be feasible are discussed using Discounted Cash Flow (DCF) and Net Present Value (NPV) models. On the basis of the appraisal being done, we move to conclude, on the basis of our analysis, whether or not the joint venture is worth taking for PATCO.

PATCO Joint Venture Case

Shortly before the end of November 2007, Mr Zaven Demarchek, President of the Port Arthur Timber Company (PATCO), had received a letter from a Brazilian lumber company concerning a proposed joint venture. The Brazilian company, Cascamon - Industrial Madeireira S.A., wanted to build a large new sawmill with facilities for producing finished lumber and construction materials. The management of Cascamon proposed that as a partner in the joint venture PATCO would supply the milling equipment and expert operating staff for the mill. In return PATCO would be given limited exploitation rights for a period of five years. At the end of the five year period, the ownership of all the equipment was to pass to Cascamon.

Mr. Demarchek found that the required machinery would be available for delivery in Brazil within twenty days after the order date. The cost of the equipment was estimated to be 13,393,596 Real. At the present buy rate for Real in terms of Canadian dollars, 1.8472 Real per Canadian dollar, this investment amounted to approximately $7,250,756. In return for this investment PATCO would be allowed to cut 150,000 cubic metres, equivalent to 63,610,000 board feet, of lumber each year for five years. The proceeds from the sale of this lumber would become the property of PATCO. Any other annual profits would belong to Cascamon. The remaining details of the proposal stated that Cascamon would provide all needed working capital and that operating costs, including the salary of the operating manager, would be divided in proportion to the amount of lumber cut. As the owner of the mill equipment, PATCO ...