Multinational Capital Budgeting 1
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
scenario, Blades should still establish a subsidiary in Thailand (without renewing its agreement with
Entertainment Products) even if it expects the baht to depreciate by 5 percent annually.
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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
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
4. Units Sold to Other
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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
Subsidiary in THB 000s
118,050
198,690
291,930
255,239
214,145
168,119
116,571
58,836
(5,826)
(78,248)
17. Net Cash Flow to Subsidiary
18. Thai Baht Remitted by
Subsidiary (100% of CF)
in THB 000s
148,050
228,690
321,930
285,239
244,145
198,119
146,571
88,836
24,174
(48,248)
19. Withholding Tax on Remitted
20. Thai Baht Remitted After
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
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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
Agreement = (1) × (2)
in THB 000s 0
28,000 31,360 35,123 39,338 44,059 49,346 55,267 61,899 69,327
4. Units Sold to Other
6. Revenue from Sales to Other
Retailers in Thailand = (4) × (5)
in THB 000s
600,000
672,000
1,379,840
1,545,421
1,730,871
1,938,576
2,171,205 2,431,750 2,723,559
3,050,387
7. Total Revenue = (3) + (6)
8. Variable Cost per Unit (in
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
28,000
31,360
35,123
39,338
44,059
49,346
55,267
61,899
69,327
12. Noncash Expense
13. Total Expenses = (9) –
(10) + (11) + (12) in THB
Multinational Capital Budgeting 5
14. Before-Tax Earnings of
Subsidiary = (7) – (13) in
15. Host Government Tax
(25%) in THB 000s 39,350 38,000 90,500 102,260 115,431 130,183 146,705 165,209 185,935 209,147
16. After-Tax Earnings of
17. Net Cash Flow to Subsidiary
= (16) + (12) in THB 000s
148,050 144,000 301,500 336,780 376,294 420,549 470,115 525,628 587,804 657,440
18. Thai Baht Remitted by
Subsidiary (100% of CF)
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
650,000
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
23. $ Cash Flow to Parent = (20) × (22) 3,003,342 2,862,760 5,874,026 6,430,148 7,040,890 7,711,578 8,448,054 9,256,735 10,144,659 23,334,794
24. PV of Parent Cash Flows
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
Agreement = (1) × (2)
in THB 000s 0
28,000 31,360 35,123 39,338 44,059 49,346 55,267 61,899 69,327
4. Units Sold to Other
Retailers in Thailand
120,000
120,000
220,000
220,000
220,000
220,000
220,000
220,000
220,000
220,000
5. Price per Unit (in Thai baht) 5,000 5,600 6,272 7,025 7,868 8,812 9,869 11,053 12,380 13,865
6. Revenue from Sales to Other
Retailers in Thailand = (4) × (5)
7. Total Revenue = (3) + (6)
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Multinational Capital Budgeting 7
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
(25%) in THB 000s 39,350 38,000 90,500 102,260 115,431 130,183 146,705 165,209 185,935 209,147
16. After-Tax Earnings of
Subsidiary in THB 000s
118,050 114,000 271,500 306,780 346,294 390,549 440,115 495,628 557,804 627,440
17. Net Cash Flow to Subsidiary
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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
2. Price per Unit (in Thai baht) — 5,600 6,272 7,025 7,868 8,812 9,869 11,053 12,380 13,865
3. Revenue from Contractual
Agreement = (1) × (2)
4. Units Sold to Other
6. Revenue from Sales to Other
Retailers in Thailand = (4) × (5)
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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.
Multinational Capital Budgeting 9
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
Subsidiary in THB 000s
118,050 114,000 271,500 306,780 346,294 390,549 440,115 495,628 557,804 627,440
17. Net Cash Flow to Subsidiary
18. Thai Baht Remitted by
Subsidiary (100% of CF)
in THB 000s
148,050 144,000 301,500 336,780 376,294 420,549 470,115 525,628 587,804 657,440
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
650,000
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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.
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
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% –$4,878,580
II. Weak S$ 30% –$6,693,440
III. Strong S$ 10% –$ 105,387
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$16,000
S$ Interest Payments S$1,600 S$1,600 S$1,600 S$1,600 S$1,600 S$1,600
Multinational Capital Budgeting 11
S$ 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
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% $2,086,997
II. Weak S$ 30% $649,510
III. Strong S$ 10% $5,766,642
b. The parent’s required rate of return may increase if the borrowed funds by the subsidiary creates a
higher degree of financial leverage for the MNC as a whole, which could increase the risk perception of
the MNC. If so, the discount rate used should reflect the higher required rate of return.
c. When using a 20 percent withholding tax instead of a 10 percent withholding tax, the results change
as follows (based on partial financing by the subsidiary):
Exchange Rate Scenario Probability NPV
I. Somewhat stable S$ 60% $1,139,090
II. Weak S$ 30% –$196,292
III. Strong S$ 10% $4,599,202
The results suggest that with a 20 percent withholding tax, there is a 70 percent chance that the
subsidiary will still generate a positive NPV. The potential negative NPV in the event of a weak S$ is
not as pronounced as the positive NPVs if either of the other events occur. Most managers would
likely still recommend accepting the project under these circumstances.
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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.
Multinational Capital Budgeting 12
d. The estimate of net cash flows could be revised, which would result in a lower NPV for each
exchange rate scenario. The accept/reject decision would be based on the overall distribution of
possible NPVs.
e. As of the end of Year 2, the present value of forgone cash flows for the following 4 years (including
the forgone salvage value at the end of Year 6) is $13,203,674. Therefore, North Star should receive
at least this amount in order to divest the subsidiary as of the end of Year 2.
Small Business Dilemma
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
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
product in a country where the product has not been popular. The quantity of footballs demanded
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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.