5 Which method of direct foreign investment should utilize a higher discount rate in the capital budgeting analysis? Would this strengthen or weaken the tentative decision of establishing a subsidiary in Thailand?

Recently, Ben Holt, Blades’ chief financial officer (CFO), has assessed whether it would be more beneficial for Blades to establish a subsidiary in Thailand to manufacture roller blades or to acquire an existing manufacturer, Skates’n’Stuff, which has offered to sell the business to Blades for 1 billion Thai baht. In Holt’s view, establishing a subsidiary in Thailand yields a higher net present value (NPV) than acquiring the existing business. Furthermore, the Thai manufacturer has rejected an offer by Blades plc for 900 million baht. A purchase price of 900 million baht for Skates’n’Stuff would make the acquisition as attractive as the establishment of a subsidiary in Thailand in terms of NPV. Skates’n’Stuff has indicated that it is not willing to accept less than 950 million baht.