1

Arnhem Business School

Aakash Sharma
Ursula Angel Tania
Zachary Jiang

2
Table of Contents
Executive summary ....................................................................................................................................... 3
Problem definition ........................................................................................................................................ 4
Methodology ................................................................................................................................................. 5
Country Risk .................................................................................................................................................. 6
BERI Analysis ................................................................................................................................................. 7
Special Economic Zone.................................................................................................................................. 9
Assumptions ................................................................................................................................................ 10
Future Cash Flow Statement ....................................................................................................................... 11
Foreign Exchange Risk ................................................................................................................................. 13
Conclusion ................................................................................................................................................... 14














3
Executive summary
Thomassen, a SME Dutch company that manufactures industrial gas turbines in a B2B market
they have 12 different locations all around the world. Right now senior management is divided
on an issue of whether or not they should expand their business operations to Poland; if they do
then should a distribution center be made or a production plant. Thats why theyve asked for in
depth analysis as to if it will be a good decision to have operations in Poland. With the research
done here we will give an overview from an investors perspective of whether or not investing in
Poland will be a good decision. This report will show the dangers and opportunities involved for
a Dutch company to invest in Wielkopolska, Poland.
This FDI project aims to evaluate several different aspects of Poland. The research is based on
BERI analysis, exchange rate forecasting and the future cash flow of the project.




4
Problem definition
Thomassen is investing in Wielkopolska, Poland with a budget of 30 million Euros. However
before they can invest there an in-depth analysis into different aspects must first be considered
such as:
the countrys risk,
companys future cash flow,
and the foreign exchange risk
Before investing in a foreign country there are two types of risks that must be first considered;
that is political risk and economical risk.
Political risk is the risk for both the business and government. A change in one countrys
political policies has an effect on the countrys business environment. This effect will influence
the companys profitability.
Economical risk is the risk that a country will be able to pay back its debts on time. A country
with a stable and growing economy will always prove to be a good investment compared to a
country that is in a slump.
Future cash flow is the prediction of the cash movement in the company. It could also measure
the cash which is generated from the investment. Poland is part of the European Union however
since the Euro debt crisis in 2010 there has been an opposition to adopting the euro so currently
the currency used is the zloty.
Foreign exchange risk is the risk for investors and multinational businesses. Whenever the
exchange rate changes it has a financial consequence. It will influence the cash flow, profitability
and market value.









5
Methodology
To able to come to a conclusion and decide whether or not investing in Poland would be feasible
we had to take some steps. We started off by first researching how the business atmosphere in
Poland is. A BERI analysis was created to determine the countrys risk and also S&P sovereign
rating was taken into account. Polish natives were also interviewed to understand what their
perspective on Poland was; this was done to have a clearer view on how the business
environment actually is. We then had to make a decision if were to create a distribution centre
or production plant. Once the research part of the project was completed we created a
spreadsheet in which an opening balance sheet, projected future cash flow statement, projected
future income statement and projected future ratios of the project were shown. Using the
information we have we then concluded and made a decision of whether or not we should invest
in Wielkopolska, Poland.

















6

Country Risk
Countries with a higher risk of doing business in possess most of the time no interest to
investors. A country with an unstable government always has a possibility of war at any given
time or even nationalization. There are many other factors that contribute to the risk of a country.
To better assess these risks we use ratings from Standard & Poors and BRS
Standard & Poors is a credit rating agency that issues ratings for the debt of private and public
corporations. Standard and Poors is also involved in issuing sovereign ratings to countries. S&P
have a foundation for their credit rating analysis which is: Political Score, Economic Score,
External Score, Fiscal Score and Monetary Score. According to Standard & Poors rating Poland
is a A- and its outlook for the economical outlook for the future is stable.
BRS (Business Risk Services) provides analytical information concerning the risks involved in
investing in a foreign country. A BERI analysis is broken down into sectors such as politics,
economics and doing business in a foreign country. In total there are 15 sections, for each section
a score is given from 0 4. Each of these scores is then multiplied by their respective weight and
the totals are then added up to give a final score. The scores determine how risky it would be to
invest in this country. The BERI analysis with a higher score means a more stable environment
for the company to invest in.








http://www.standardandpoors.com/ratings/sovereigns/ratings-list/en/us
http://www.beri.com/About-BERI.aspx
http://www.investopedia.com/terms/c/countryrisk.asp
7
BERI Analysis
Criterion Weight Score (0
4)
Weight *
Score
Comments and Explanation
Political stability 3.0 3 9 According to the Political Instability Index, Poland has an index score of
3.5 out of 10.
Attitude FDI & Profit transfer 1.5 3 4.5 To determine the Attitude of FDI and profit transfer in Poland we used The
Ease of Establishment Index and a table called Investing across Sectors; it
shows foreign equity ownership indexes for companies across in 33
different sectors.
The Ease of Establishment Index measures the steps needed to create a
new business and the amount of days it will take to start it. Using this
index we determined that Poland is an index score of 85.
Using the Investing across Sectors table we see that Poland imposes
restrictions on 5 of the 33 sectors.
Possibility of nationalisation 1.5 3 4.5 Right now the president of Poland is from a right wing party called PO also
known in English as Civic Platform. Just recently Poland nationalized their
retirement accounts in a hope to reduce Public Debt by 8% of GDP.
Inflation 1.5 4 6 Inflation was last recorded at 1.1% in July 2013.
BOP 1.5 3 4.5 For the first quarter of 2013 the BOP was in a deficit of 4.1 billion $US.
Poland is the only member of the EU to survive the late 2000s recession.
Bureaucratic delay 1.0 2 2 A relatively high number of foreign investment in Poland, government
makes the process easier.
Economic growth (GDP) 2.5 2 5 OECD website, Poland's result -> more than half of EU Area's average,
still higher than several countries like Portugal, Belgium, etc .
Currency & Convertibility 2.5 4 10 The government doesnt have restrictions in Poland when it comes to
converting currencies.
Wages & labour productivity 2.0 4 8 Labour productivity: in 2012 the highest among app. 35 countries located
in Europe
Short-term loans 2.0 2 4 Slightly complicated for foreign company to get a loan. (There are too
many requirements to be fulfilled)
Long-term loans 2.0 2 4 Although The Council decided to keep the NBP interest rates unchanged,
8
but due to the pressure of the inflation rate and recent economic situation,
the growth in corporate loans declined further.
Contract law 1.5 1 1.5 The contract law in Poland still have some unclear areas, some of the laws
are vaguely defined. Also the corruption is still exist in the legal system.
Communication & Transport 1.0 0.5 0.5 The lack of wealth, bad road condition with aggressive and selfish driving
habits, which cause Poland has some of the most dangerous roads in
Europe. In the mean time, the transportation system is still not finish their
development process.
Local management 1.0 1.5 1.5 Although Poland government have a serious issue of corruption, but
Wielkopolska is the one of the best well-organized and well-developed
area in Poland.
Professional services 0.5 0.5 0.75 Comparing with the whole labor force size, the statistics of labor force
with tertiary education in Poland is quite low. And every year there are a
big amount of well educated polish people decide to work at another
nation.
Total score 65.75


From the BERI analysis we can conclude that Poland is a suitable business environment for us to conduct our operations.
9

Special Economic Zone
Poland is an attractive country to do business in and this is mainly because of its special
economic zones. A special economic zone is a specific region within a country that has different
sorts of economical policies concerning a day to day business activity. These policies are in fact
designed to attract foreign direct investment into the region. By attracting foreign direct investors
there are more jobs and the economy grows.
Poland is the most ambitious in attracting foreign direct investment compared to the rest of
Central and Eastern Europe. There are a set of investment incentives for when you decide to
conduct business in Poland. Any incentives that are granted are subjected to polish state rules.
Underneath the Innovative Economy Operational Programme (IE OP) state aids are given to
enterprises. According to the IE OP enterprises are categorized as small, medium, and large
enterprises. A small enterprise employs less than 50 employees and has an annual turnover less
than 10 million Euros. A medium enterprise employs less than 250 and has an annual turnover
less than 250 million Euros. A large enterprise employs and has an annual turnover greater than a
medium enterprise.
According to future payrolls and future cash flow statements, we are a middle sized enterprise
and can obtain subsidies 30% of eligible costs. Eligible costs include the purchase of land,
purchase of tangible and intangible assets.










www.paiz.gov.pl/files/?id_plik=10800
www.paiz.gov.pl/files/?id_plik=13594
http://www.paiz.gov.pl/investment_support/sez


10
Assumptions

















We have a set of assumptions regarding our investment in Poland. First we use 15 years as the
economic life project; this is expected period of time till when an asset is useful to the owner.
Our company is 75% financed by debt and 25% by equity. We found this by creating a
benchmark with other gas turbine manufacturers such as Turbomeca Industrial, Turbo Power and
Marine Systems, and General Electric.
We receive a loan of 22,500,000 from ING Bank lski with an interest rate of 4.3%.
The required return is the average return we as an investor would like to receive annually each
year here it is 10% and the risk free interest rate, which is the interest we would expect with no
risk of financial loss, is 4.5%.
Our total investment is 30,000,000 however since we earn in Zloty our exchange rate is 1 =
4.2 PLN and hence 126,000,000.00 z.
Economic life project 15 years
Debt ratio 0.75
Equity ratio 0.25
Duration loan 15 years
Project beta 2.5

Interest rate debt 4.30%
Required return market 10%
Risk free interest rate 4.50%
Corporate tax rate 19%
Expected risk 2.5%
Expected inflation 4%
DF 7%
Subsidies percentage 30%

CPI The Netherlands 2.40%
CPI Poland 2.70%
Cost increase PA 3.75%
Interest rate 4%
Total investment 126,000,000.00 z

production/day 18
production annualy 6570
production value 27594000
profit margin 120%
Selling price 33112800
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Future Cash Flow Statement

The following table shows the future cash flow statement over a projection of 15 years with its discount rate.
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Net cash
inflow
(CF) (PLN)
-
126,000,0
00
10,380,62
6
11,228,94
4
12,100,84
6
12,997,2
16
13,918,9
72
14,867,0
64
15,842,4
81
16,846,2
48
17,879,4
28
18,943,1
23
20,038,4
78
21,166,68
0
22,328,96
1
23,526,60
0
24,760,92
1
Net cash
inflow
(CF) (EUR)
-
30,000,00
0
2,491,350 13,991,36
6
15,114,28
4
16,273,2
18
17,469,5
66
18,704,7
82
19,980,3
78
21,297,9
28
22,659,0
68
24,065,4
99
25,518,9
91
27,021,38
3
28,574,59
0
30,180,60
2
31,841,48
9
Cumulativ
e net cash
inflow
(PLN)
-
126,000,0
00
-
115,619,3
74
-
104,390,4
30
-
92,289,58
4
-
79,292,3
67
-
65,373,3
96
-
50,506,3
32
-
34,663,8
51
-
17,817,6
03
61,825 19,004,9
48
39,043,4
25
60,210,10
5
82,539,06
7
106,065,6
67
130,826,5
88
Cumulativ
e net cash
inflow
(EUR)
-
30,000,00
0
-
27,748,65
0
-
130,071,4
15
-
115,272,1
84
-
99,278,3
34
-
82,049,5
13
-
63,543,8
11
-
43,717,7
00
-
22,525,9
67
78,352 24,144,0
42
49,721,7
82
76,864,21
9
105,626,0
51
136,064,1
04
168,237,4
18
Discount
factor
(DF)
1.00 0.93 0.87 0.81 0.76 0.71 0.66 0.62 0.57 0.54 0.50 0.47 0.44 0.41 0.38 0.35
DF*CF
(PLN)
-
126,000,0
00
9,685,701 9,775,837 9,829,656 9,851,00
3
9,843,39
1
9,810,03
0
9,753,84
5
9,677,50
4
9,583,43
7
9,473,85
6
9,350,77
2
9,216,011 9,071,232 8,917,938 8,757,489
DF*CF
(EUR)
-
30,000,00
0
2,324,568 12,180,78
1
12,277,50
6
12,333,9
88
12,354,3
45
12,342,3
47
12,301,4
51
12,234,8
18
12,145,3
42
12,035,6
65
11,908,2
03
11,765,16
0
11,608,54
5
11,440,18
9
11,261,75
8
Cumulativ
e
CF*DF(PL
N)
-
126,000,0
00
-
116,314,2
99
-
106,538,4
62
-
96,708,80
6
-
86,857,8
03
-
77,014,4
12
-
67,204,3
82
-
57,450,5
37
-
47,773,0
33
-
38,189,5
96
-
28,715,7
40
-
19,364,9
68
-
10,148,95
7
-1,077,725 7,840,214 16,597,70
3
Cumulativ
e
CF*DF(EU
R)
-
30,000,00
0
-
27,675,43
2
-
15,494,65
0
-3,217,145 9,116,84
4
21,471,1
88
33,813,5
36
46,114,9
87
58,349,8
05
70,495,1
47
82,530,8
12
94,439,0
15
106,204,1
75
117,812,7
20
129,252,9
08
140,514,6
66
12
Foreign country Home country
NPV PLN 16,597,702.69 140,514,666.40
NPV/investment 0.13 4.68
IRR 9% 41.59%
PBP 9 9
BET 14 4
ROI 13.84% 74.77%

Re 18.25%
WACC 7.1747500%

By looking at these calculations we can understand how the investment will do. An important
thing to consider is WAAC, it is the expected return to investors and lenders.











13
Foreign Exchange Risk

Foreign exchange risk is the risk that we possess when converting one currency to another. In order for us to forecast foreign exchange risk between the
Euro and Polish Zloty we must use the PPP method. In this method we obtain and compare the CPI of the two currencies from the previous year and make
calculations to find the forecasted foreign exchange rate.
2013
CPI The Netherlands 2%
CPI Poland 2.70%
Delta 0.30%
Current exchange rate (zloty to euro) 0.24

Year 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Foreign
Exchange
0.24 1.2460 1.2490 1.2521 1.2551 1.2581 1.2612 1.2643 1.2673 1.2704 1.2735 1.2766 1.2797 1.2828 1.2860





http://data.worldbank.org/indicator/FP.CPI.TOTL.ZG
http://www.xe.com/currencyconverter/convert/?From=EUR&To=PLN
http://economics.about.com/cs/money/a/purchasingpower.htm
14
Conclusion

After researching weve come to a conclusion that investing in Poland would not be a good
decision. Even though we have a return on investment of 13, 84% its not good enough
considering our net present value is too low. We have a net present value of PLN 16,597,702.69
and we invested a total of PLN 216,000,000. It isnt feasible at all to expand into Poland, our advice
would be to not consider investing in Poland but maybe another country.
15
Sources

BERI Analysis
Political stability http://viewswire.eiu.com/site_info.asp?info_name=social_unrest_table&pag
e=noads
Attitude FDI & Profit
transfer
http://iab.worldbank.org/Data/Explore%20Topics/Starting-a-foreign-
business
Possibility of
nationalisation
http://en.poland.gov.pl/Political,Parties,395.html
http://www.reuters.com/article/2013/06/26/poland-pensionfunds-
idUSL5N0F215120130626
Inflation http://www.tradingeconomics.com/poland/inflation-cpi
BOP http://stats.oecd.org/Index.aspx?QueryId=3017
Bureaucratic delay http://www.economist.com/blogs/easternapproaches/2012/04/polish-
bureaucracy
Economic growth (GDP) http://stats.oecd.org/Index.aspx?DatasetCode=LEVEL
Currency & Convertibility
http://www.nbp.pl/homen.aspx?f=/en/onbp/informacje/polityka_pieniezna.html
Wages & labour
productivity
http://stats.oecd.org/Index.aspx?DatasetCode=PDYGTH
Short-term loans
http://www.poland-mortgage-direct.com/mortgage.html
Long-term loans http://www.nbp.pl/en/aktualnosci/2013/mpc_2013_09_04.pdf
http://www.poland-mortgage-direct.com/mortgage.html
Contract law http://www.polishcontractlaw.pl/page1.php
Communication &
Transport
http://www.economist.com/blogs/easternapproaches/2013/06/polish-
driving
Local management http://www.purple-eu.org/home/about/members/wielkopolska/
Professional services http://www.nationmaster.com/country/pl-poland/lab-labor