Solution to Continuing Case Problem: Blades, Inc.
1. Should the sales and the associated costs of 180,000 pairs of roller blades to be sold in Thailand under
the existing agreement be included in the capital budgeting analysis to decide whether Blades should
establish a subsidiary in Thailand? Should the sales resulting from a renewed agreement be included?
Why or why not?
ANSWER: The sales from the existing agreement should not be included in the capital budgeting
analysis to decide whether Blades should establish a subsidiary in Thailand. Blades will generate
these sales whether or not it establishes a subsidiary in Thailand. The cost savings of 300 Thai baht
2. Using a spreadsheet, conduct a capital budgeting analysis for the proposed project assuming that
Blades renews the agreement with Entertainment Products. Should Blades establish a subsidiary in
Thailand under these conditions?
ANSWER: (See spreadsheet attached.) The spreadsheet shows a positive net present value (NPV) of
percent has fully accounted for the project’s risk.
3. Using a spreadsheet, conduct a capital budgeting analysis for the proposed project assuming that
Blades does not renew the agreement with Entertainment Products. Should Blades establish a
subsidiary in Thailand under these conditions? Should Blades renew the agreement with
Entertainment Products?
ANSWER: (See spreadsheet attached.) The spreadsheet shows a positive NPV of $8,746,688 if
Blades establishes a subsidiary in Thailand and does not renew the agreement with Entertainment
4. Since future economic conditions in Thailand are uncertain, Ben Holt would like to know how critical
the salvage value is in the alternative you think is most feasible.
ANSWER: (See spreadsheet attached.) The capital budgeting analysis in question 2 was the most
5. The future value of the baht is highly uncertain. Under a worst case scenario, the baht may depreciate
by as much as 5 percent annually. Revise your spreadsheet to illustrate how this would affect Blades’
decision to establish a subsidiary in Thailand (Use the capital budgeting analysis you have identified
as the most favorable from questions 2 and 3 to answer this question.)
ANSWER: (See spreadsheet attached.) The spreadsheet shows that an annual depreciation of 5
percent of the Thai baht will result in a positive NPV of $5,620,315. Since this is a worst case
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Multinational Capital Budgeting 2
Answer to Question b:
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
1. Units Sold to
180,00
180,00
180,00
180,00
180,00
2. Price per Unit (in Thai baht) — 4,594 4,594 4,594 4,594 4,594 4,594 4,594 4,594 4,594
3. Revenue from Contractual
in THB 000s
4. Units Sold to Other
Retailers in Thailand
120,
000
1
20,000
2
20,000
2
20,000
220,000
220,000
220,000
220,000
220,000
220,000
6. Revenue from Sales to Othe
in THB 000s
7. Total Revenue = (3) + (6)
8. Variable Cost per Unit (in
3,
9. Total Variable Cost = [(1) +
2,763,
3,094,
3,466,
3,882,
10. Less Cost Savings from Production
of 108,000 Pairs in Thailand
in THB 000s
32,400 — — ———————
11. Fixed Operating
(in Thai baht 000s)
28,0
31,3
35,1
39,
44,
49,
55,
61,
69,
12. Noncash Expense
13. Total Expenses = (9) –
000s
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Multinational Capital Budgeting 3
14. Before-Tax Earnings of
Subsidiary = (7) – (13) in
THB 000s
157,400
264,920
389,240
340,318
285,526
224,159
155,428
78,449
(7,768) (104,331)
15. Host Government Tax
16. After-Tax Earnings of
198,6
291,9
255,2
214,
168,1
116,5
58,
(5,
(78,
= (16) + (12) in THB 000s
148,050
228,690
321,930
285,239
244,145
198,119
146,571
36
74
8)
18. Thai Baht Remitted by
Subsidiary (100% of CF)
19. Withholding Tax on Remitted
Funds (10%) in THB 000s 14,805 22,869 32,193 28,524 24,414 19,812 14,657 8,884 2,417
—
20. Thai Baht Remitted After
79,9
21,7
(48,24
21. Salvage Value in THB
000s
650,
000
22. Exchange Rate of Baht $0.02254 $0.02209 $0.02165 $0.02121 $0.02079 $0.02037 $0.01997 $0.01957 $0.01918 $0.01879
25. Initial Investment by
Parent $12,650,000
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or otherwise on a password-protected website for classroom use.
Multinational Capital Budgeting 4
Answer to Question c:
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
1. Units Sold to
Entertainment Products
— 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000
3. Revenue from Contractual
in THB 000s
4. Units Sold to Other
Retailers in Thailand
120,
000
1
20,000
2
20,000
2
20,000
220,000
220,000
220,000
220,000
220,000
2
20,000
6. Revenue from Sales to Other
in THB 000s
7. Total Revenue = (3) + (6)
8. Variable Cost per Unit (in
Thai baht)
3,
500
3,920
4,390
4,917
5,507
6,168
6,908
7,737
8,666
9,706
9. Total Variable Cost = [(1) +
10. Less Cost Savings from Production
of 108,000 Pairs in Thailand
in THB 000s
32,400 — — — — — — — — —
11. Fixed Operating Expenses
(in Thai baht 000s)
25,000
28,0
00
31,3
60
35,1
23
39,
338
44,
059
49,
346
55,
267
61,
899
69,3
27
12. Noncash Expense
13. Total Expenses = (9) –
000s
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or otherwise on a password-protected website for classroom use.
Multinational Capital Budgeting 5
14. Before-Tax Earnings of
Subsidiary = (7) – (13) in
THB 000s
157,400 152,000 362,000 409,040 461,725 520,732 586,820 660,838 743,738 836,587
15. Host Government Tax
16. After-Tax Earnings of
17. Net Cash Flow to Subsidiary
18. Thai Baht Remitted by
in THB 000s
19. Withholding Tax on Remitted
Funds (10%) in THB 000s 14,805 14,400 30,150 33,678 37,629
42,055 47,011 52,563 58,780 65,744
20. Thai Baht Remitted After
21. Salvage Value in THB
000s
650,0
00
25. Initial Investment by
Parent $12,650,000
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Multinational Capital Budgeting 6
Answer to Question d:
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
1. Units Sold to
Entertainment Products
— 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000
3. Revenue from Contractual
in THB 000s 0
4. Units Sold to Other
Retailers in Thailand
120,
000
1
20,000
2
20,000
2
20,000
220,000
220,000
220,000
220,000
220,000
2
20,000
6. Revenue from Sales to Other
in THB 000s
7. Total Revenue = (3) + (6)
8. Variable Cost per Unit (in
3,
9. Total Variable Cost = [(1) +
10. Less Cost Savings from Production
of 108,000 Pairs in Thailand
in THB 000s
32,400 — — — — — — — — —
(in Thai baht 000s)
25,000
00
60
23
338
059
346
267
899
27
12. Noncash Expense
13. Total Expenses = (9) –
000s
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Multinational Capital Budgeting 7
14. Before-Tax Earnings of
Subsidiary = (7) – (13) in
157,400
15. Host Government Tax
16. After-Tax Earnings of
17. Net Cash Flow to Subsidiary
18. Thai Baht Remitted by
in THB 000s
19. Withholding Tax on Remitted
20. Thai Baht Remitted After
21. Salvage Value in THB
000s
0
22. Exchange Rate of Baht $0.02254 $0.02209 $0.02165 $0.02121 $0.02079 $0.02037 $0.01997 $0.01957 $0.01918 $0.01879
24. PV of Parent Cash Flows
2,402,6
25. Initial Investment by
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Multinational Capital Budgeting 8
Answer to Question e:
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
1. Units Sold to
Entertainment Products
— 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000
3. Revenue from Contractual
in THB 000s
4. Units Sold to Other
120,
1
2
2
2
6. Revenue from Sales to Other
in THB 000s
7. Total Revenue = (3) + (6)
8. Variable Cost per Unit (in
3,
9. Total Variable Cost = [(1) +
10. Less Cost Savings from Production
of 108,000 Pairs in Thailand
in THB 000s
32,400
— — — — — — — — —
11. Fixed Operating Expenses
28,0
31,3
35,1
39,
44,
49,
55,
61,
69,3
12. Noncash Expense
13. Total Expenses = (9) –
000s
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or otherwise on a password-protected website for classroom use.
Multinational Capital Budgeting 9
14. Before-Tax Earnings of
THB 000s
15. Host Government Tax
16. After-Tax Earnings of
17. Net Cash Flow to Subsidiary
18. Thai Baht Remitted by
Subsidiary (100% of CF)
19. Withholding Tax on Remitted
20. Thai Baht Remitted After
21. Salvage Value in THB
000s
650,
000
24. PV of Parent Cash Flows
25. Initial Investment by
Parent $12,650,000
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or otherwise on a password-protected website for classroom use.
Multinational Capital Budgeting 10
Solution to Supplemental Case: North Star Company
a. The analysis based on total parent financing is shown below using the somewhat stable exchange rate
scenario (in 1,000s)
0123456
S$ Cash Flows (excluding
S$ Interest Payments 0 0 0 0 0
S$ Cash Flows (after
accounting for interest
payments) S$8,000 S$10,000 S$14,000 S$16,000 S$16,000 S$16,000
S$ Cash Flows to be
S$ Cash Flows to be
Converted to $ S$3,600 S$4,500 S$6,300 S$7,200 S$7,200 S$7,200
Salvage Value S$30,000
Present Value Interest
Factor (18%) .8475 .7182 .6086 .5158 .4371 .3704
Applying the same procedure from the previous table, the NPV for each exchange rate scenario is:
Exchange Rate Scenario Probability NPV
I. Somewhat stable S$ 60% –$4,878,580
The analysis based on partial financing by the subsidiary is shown below using the somewhat stable
exchange rate scenario.
(Cash amounts in thousands)
0123456
S$ Cash Flows (excluding
S$ interest payments) S$8,000 S$10,000 S$14,000 S$16,000 S$16,000 S$16,000
S$ Cash Flows (after
accounting for interest
payments) S$6,400 S$8,400 S$12,400 S$14,400 S$14,400 S$14,400
S$ Cash Flows to be
S$ Cash Flows to be
Converted to $ S$2,880 S$3,780 S$5,580 S$6,480 S$6,480 S$6,480
Salvage Value S$20,000
Present Value Interest
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Multinational Capital Budgeting 11
Initial Outlay $10,000
NPV $2,086,997
Applying the same procedure from the previous table, the NPV for each exchange rate scenario is:
Exchange Rate Scenario Probability NPV
I. Somewhat stable S$ 60% $2,086,997
For each possible scenario, partial subsidiary financing leads to more favorable results. Thus, this
method of financing should be chosen.
b. The parent’s required rate of return may increase if the borrowed funds by the subsidiary creates a
c. When using a 20 percent withholding tax instead of a 10 percent withholding tax, the results change
as follows (based on partial financing by the subsidiary):
Exchange Rate Scenario Probability NPV
I. Somewhat stable S$ 60% $1,139,090
e. As of the end of Year 2, the present value of forgone cash flows for the following 4 years (including
Multinational Capital Budgeting by the Sports Exports Company
1. Describe the capital budgeting steps that would be necessary to determine whether this proposed
project is feasible, as related to this specific situation.
ANSWER: Jim would need to estimate the amount of footballs that would be sold to the distributor
in Mexico each month. The revenue to be received would be equal to the number of footballs sold
times the price (in pesos) per football. This revenue would be converted into dollars, at the prevailing
2. Explain why there is uncertainty surrounding the cash flows of this project.
ANSWER: First, the number of footballs to be sold is very uncertain. The firm is attempting to sell a
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.