Novonik, an Australian firm, has recently experienced significant competition across

Europe. To diversify their customer base, the firm plans to expand its operations to Southeast Asia

through Thailand. The research has cost Thai Baht 20mil. The plant expansion cost is THB 600

million, which must be immediately expended. Additionally, to set up the plan, Novonik would

need to fund additional working capital of THB 50mil at the time of the expansion. Additional net

working capital would be THB 60mil, THB 80mil, and THB 100mil in years 1, 2, and 3,

respectively. Novonik is a capital-intensive firm, so it will depreciate the plant at a rate of THB 50

million per year (starting in year 1). To maintain and improve the plan, Novonik will have to inject

additional capital expenditures of THB50mil per year.

The cash flows are projected up to three years, and the terminal value is computed based

on the year 3 free cash flow (FCF) assuming a growth rate that equals the regions long-run GDP

growth rate. The Earnings before Interests, Taxes, Depreciation and Amortisation (EBITDA) are

projected to be THB150mil, THB250mil, and THB290 mil for year 1, year 2, and year 3,

respectively.

All taxes are paid in Thailand in the year the income is earned. The following information

applies to the valuation.

E) Calculate the AUD value of FCF for the years 0, 1, 2 and 3 and the terminal value using the

forward rates calculated in (D). What is the NPV of the project in AUD? Hint: Use

Australian discount rate. (6 marks)

F) Do you think whether the NPV in part C or Part E is more accurate in capturing the project

value? Should Novonik invest in Southeast Asia? Explain your answer. (4 marks)

Thailand Australia Price Inflation 5.00% 2.00% Annual return on government bonds 3.00% 2.5% Corporate tax rate 30.00% 40.00% Equity market risk premium 8.00% 5.00% Spot rate (AUD/THB) 0.042 Before tax cost of debt 7.00% 6.00% Debt-to-value ratio (D/V) 0.3 0.3 Systematic risk (beta) 1.5 1.2 Additional information is collected. The region's long-term GDP growth rate is 4% p.a. The country political risk premium is 2%, which should be added to the cost of capital. Required: A) Calculate the project-specific cost of capital in THB term. (5 marks) B) Calculate the Free Cash Flows of the project in THB term. (5 marks) C) Calculate the NPV of the project in THB term. (2 marks) D) Calculate the forward exchange rates, F(AUD/THB) through F3(AUD/THB), for the years 1, 2, and 3 based on the spot rate and the interest rates given in the question. (round to 5 decimal places). (3 marks) Thailand Australia Price Inflation 5.00% 2.00% Annual return on government bonds 3.00% 2.5% Corporate tax rate 30.00% 40.00% Equity market risk premium 8.00% 5.00% Spot rate (AUD/THB) 0.042 Before tax cost of debt 7.00% 6.00% Debt-to-value ratio (D/V) 0.3 0.3 Systematic risk (beta) 1.5 1.2 Additional information is collected. The region's long-term GDP growth rate is 4% p.a. The country political risk premium is 2%, which should be added to the cost of capital. Required: A) Calculate the project-specific cost of capital in THB term. (5 marks) B) Calculate the Free Cash Flows of the project in THB term. (5 marks) C) Calculate the NPV of the project in THB term. (2 marks) D) Calculate the forward exchange rates, F(AUD/THB) through F3(AUD/THB), for the years 1, 2, and 3 based on the spot rate and the interest rates given in the question. (round to 5 decimal places)