Multinational Capital Budgeting ❖ 32
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)
39,350
66,230
97,310
85,080
71,382
56,040
38,857
19,612
(1,942)
(26,083)
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
= (16) + (12) in THB 000s
148,050
228,690
321,930
285,239
244,145
198,119
146,571
88,836
24,174
(48,248)
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
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
Withholding Taxes in THB 000s
133,245
205,821
289,737
256,715
219,730
178,307
131,914
79,953
21,757
(48,248)
650,000
$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
4,546,421
6,272,057
5,446,070
4,568,230
3,632,900
2,633,905
1,564,480
417,208
1,308,530
24. PV of Parent Cash Flows
(25% Discount Rate)
2,402,674
2,909,710
3,211,293
2,230,710
1,496,918
952,343
552,370
262,476
55,997
1,214,244
25. Initial Investment by
Parent
$12,650,000
26. Cumulative PV
(10,247,326)
(7,337,617)
(4,126,323)
(1,895,613)
(398,695)
553,648
1,106,018
1,368,494
1,424,490
2,638,735
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
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)
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)
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)
in THB 000s
600,000
700,000
1,411,200
1,580,544
1,770,209
1,982,634
2,220,551
2,487,017
2,785,459
3,119,714
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) +
(4)] × (8) in THB 000s
420,000
490,000
987,840
1,106,381
1,239,146
1,387,844
1,554,385
1,740,912
1,949,821
2,183,800
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
(Depreciation) in THB 000s
30,000
30,000
30,000
30,000
30,000
30,000
30,000
30,000
30,000
30,000
13. Total Expenses = (9) –
(10) + (11) + (12) in THB
000s
442,600
548,000
1,049,200
1,171,504
1,308,484
1,461,903
1,633,731
1,826,179
2,041,720
2,283,126
Multinational Capital Budgeting ❖ 35
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
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)
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)
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)
in THB 000s
600,000
700,000
1,411,200
1,580,544
1,770,209
1,982,634
2,220,551
2,487,017
2,785,459
3,119,714
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) +
(4)] × (8) in THB 000s
420,000
490,000
987,840
1,106,381
1,239,146
1,387,844
1,554,385
1,740,912
1,949,821
2,183,800
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
(Depreciation) in THB 000s
30,000
30,000
30,000
30,000
30,000
30,000
30,000
30,000
30,000
30,000
13. Total Expenses = (9) –
(10) + (11) + (12) in THB
000s
442,600
548,000
1,049,200
1,171,504
1,308,484
1,461,903
1,633,731
1,826,179
2,041,720
2,283,126
Multinational Capital Budgeting ❖ 37
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)
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)
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)
in THB 000s
600,000
700,000
1,411,200
1,580,544
1,770,209
1,982,634
2,220,551
2,487,017
2,785,459
3,119,714
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) +
(4)] × (8) in THB 000s
420,000
490,000
987,840
1,106,381
1,239,146
1,387,844
1,554,385
1,740,912
1,949,821
2,183,800
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
(Depreciation) in THB 000s
30,000
30,000
30,000
30,000
30,000
30,000
30,000
30,000
30,000
30,000
13. Total Expenses = (9) –
(10) + (11) + (12) in THB
000s
442,600
548,000
1,049,200
1,171,504
1,308,484
1,461,903
1,633,731
1,826,179
2,041,720
2,283,126
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):
0 1 2 3 4 5 6
Converted to $ S$3,600 S$4,500 S$6,300 S$7,200 S$7,200 S$7,200
Salvage Value S$30,000
Exchange Rate of S$ $.50 $.51 $.48 $.50 $.52 $.48
$ Cash Flows $1,800 $2,295 $3,024 $3,600 $3,744 $17,856
Present Value Interest
exchange rate scenario.
Multinational Capital Budgeting ❖ 40
(Cash amounts in thousands)
0 1 2 3 4 5 6
S$ Cash Flows (excluding
Exchange Rate of S$ $.50 $.51 $.48 $.50 $.52 $.48
$ Cash Flows $1,440 $1,927.8 $2,678.4 $3,240 $3,369.6 $12,710.4
Present Value Interest
Factor (18%) .8475 .7182 .6096 .5158 .4371 .3704
Present Value $1,219.68 $1,384.16 $1,631.145 $1,671.84 $1,472.515 $4,702.848
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