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.

Additional information is collected. The regions 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:

1. Calculate the project-specific cost of capital in THB term. (5 marks)

2. Calculate the Free Cash Flows of the project in THB term. (5 marks)

3. Calculate the NPV of the project in THB term. (2 marks)

4. Calculatetheforwardexchangerates,F1(AUD/THB)throughF3(AUD/THB),fortheyears

   1, 2, and 3 based on the spot rate and the interest rates given in the question. (round to 5 decimal places). (3 marks)

5. 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)

6. 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)

Price Inflation Annual return on government bonds Corporate tax rate Equity market risk premium Spot rate (AUD/THB) Before tax cost of debt Debt-to-value ratio (D/V) Systematic risk (beta) Thailand 5.00% 3.00% 30.00% 8.00% 0.042 7.00% 0.3 1.5 Australia 2.00% 2.5% 40.00% 5.00% 6.00% 0.3 1.2 Price Inflation Annual return on government bonds Corporate tax rate Equity market risk premium Spot rate (AUD/THB) Before tax cost of debt Debt-to-value ratio (D/V) Systematic risk (beta) Thailand 5.00% 3.00% 30.00% 8.00% 0.042 7.00% 0.3 1.5 Australia 2.00% 2.5% 40.00% 5.00% 6.00% 0.3 1.2