Business Case Studies & Business Publications

Geosystems Technology Group

Lipson, Marc L.

Case

Geosystems Technology Group

Lipson, Marc L.

F-1650 | Published August 16, 2011 | 6 Pages Case

Collection: Darden School of Business

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The owner of a US technology company, Geosystems Technology Group (Geo Tech) is considering investing in a Canadian facility. The service it provides requires firms to store proprietary data on Geo Tech’s servers. The owner is interested in establishing a Canadian facility because of concern by Canadian companies about the ability of the US government to access their data at a US location. This concern is expected to be short-lived, so the investment has a clear five-year life. An important aspect of this investment opportunity is that the cash flows will all be in Canadian dollars and, therefore, changes in the value of the Canadian dollar would affect the desirability of the project. This fictional case has been successfully used as an introduction to valuing non-domestic-currency-denominated projects in the MBA program at the Darden School of Business as part of the core finance curriculum. The case needs to be taught after students have developed their understanding of the calculations related to project valuation—the calculation of free cash flow and the use of an appropriate hurdle rate. Students do not need a background in exchange rate calculations or exchange rate prediction, but that background can be very useful. The case can be used either to apply those concepts or to introduce them. It is written to be flexible and can be used at various places in a course on international finance or business.

This case can be used to pursue the following objectives: (1) Introduce methods to value projects that have non-domestic-currency-denominated cash flows. (2) Apply skills related to estimating project cash flows where the underlying business model exhibits features associated with technology—it is highly scalable, with predominantly fixed costs and subscription-type revenues. (3) Illustrate the effects of inflation on cash flows—in particular, contrast cash flows that are affected by inflation with those that are not. (4) Provide a practical context in which to execute a non-domestic-currency forecast based on inflation rates—for example, using purchasing power parity (PPP).