Holt wishes to analyze the financial feasibility of establishing a subsidiary in Thailand. As Blades$$ financial analyst, you have been given the task of analyzing the proposed project. Because future economic conditions in Thailand are highly uncertain, Holt has also asked you to conduct some sensitivity analyses. Fortunately, he has provided most of the information you need to conduct a capital budgeting analysis. This information is detailed here:

The building and equipment needed for the Thai subsidiary will cost $550$ million Thai baht. This amount includes additional funds to support working capital.

The Thai plant and equipment, valued at $300$ million baht, will be depreciated using straight$-$line depreciation. Thus, $30$ million baht will be depreciated annually for $10$ years.

The variable costs needed to manufacture Speedos are estimated to be $3,500$ baht per pair next year.

Blades$$ fixed operating expenses, such as administrative salaries, will be $25$ million baht next year.

The current spot exchange rate of the Thai baht is $$0\mathrm{.}023.$ Blades expects the baht to depreciate by an average of $2$ percent per year for the next $10$ years.

The Thai government will impose a $25$ percent tax rate on income and a $10$ percent withholding tax on any funds remitted by the subsidiary to Blades. Any earnings remitted to the United States will not be taxed again.

After $10$ years, Blades expects to sell its Thai subsidiary for approximately $650$ million baht, after considering any capital gains taxes.

The average annual inflation in Thailand is expected to be $12$ percent. Unless prices are contractually fixed, revenue, variable costs, and fixed costs are subject to inflation and are expected to change by the same annual rate as the inflation rate.

Blades could continue its current operations of exporting to and importing from Thailand, which have generated a return of approximately $20$ percent. Blades requires a return of $25$ percent on this project to justify the proposed investment in Thailand. All excess funds generated by the Thai subsidiary will be remitted to Blades and will be used to support U$.$S$.$ operations.

Holt has asked you to answer the following questions:

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?

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?

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?