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?

BLADES, INC. CASE Fortunately, he has provided most of the information the proposed investment in Thailand. All excess funds Decision by Blades, Inc., to Invest in Thailand you need to conduct a capital budgeting analysis. This generated by the Thai subsidiary will be remitted to information is detailed here: Blades and will be used to support U.S. operations. Because Ben Holt, Blades' chief financial officer, Entertainment Products has already declared its The building and equipment needed for the Thai Holt has asked you to answer the following questions: believes the growth potential for the roller blades mar- willingness to renew the agreement for another three subsidiary will cost 550 million Thai baht. This 1. Should the sales and the associated costs of ket in Thailand is very high, he has decided to invest years under identical terms. Because of recent delivery amount includes additional funds to support work- 180,000 pairs of roller blades to be sold in Thailand in Thailand. This investment would involve establish- delays, however, it is willing to renew the agreement ing capital. under the existing agreement be included in the capi- ing a subsidiary in Bangkok consisting of a manufac only if Blades has operations in Thailand. Moreover, The Thai plant and equipment, valued at 300 million tal budgeting analysis to decide whether Blades should turing plant to produce Speedos, Blades' high-quality if Blades has a subsidiary in Thailand, Entertainment baht, will be depreciated using straight-line depre- establish a subsidiary in Thailand? Should the sales roller blades. Holt believes that economic conditions in Products will keep renewing the existing agreement as ciation. Thus, 30 million baht will be depreciated resulting from a renewed agreement be included? Why Thailand will be relatively strong in 10 years, when he long as Blades operates in Thailand. If the agreement is annually for 10 years. or why not? The variable costs needed to manufacture Speedos are expects to sell the subsidiary. renewed, Blades expects to sell a total of 300,000 pairs of 2. Using a spreadsheet, conduct a capital budgeting estimated to be 3,500 baht per pair next year. Blades will continue exporting its roller blades to Speedos annually during its first two years of operation analysis for the proposed project, assuming that Blades Blades' fixed operating expenses, such as administra- the United Kingdom under an existing agreement with in Thailand to various retailers, including 180,000 pairs renews the agreement with Entertainment Products. tive salaries, will be 25 million baht next year. Jogs, Ltd., a British retailer. Furthermore, it will con- to Entertainment Products. After this time, it expects to Should Blades establish a subsidiary in Thailand under The current spot exchange rate of the Thai baht is these conditions? tinue its sales in the United States. Under an existing sell 400,000 pairs annually (including the 180,000 pairs $0.023. Blades expects the baht to depreciate by an agreement with Entertainment Products, Inc., a Thai purchased by Entertainment Products). If the agreement average of 2 percent per year for the next 10 years. 3. Using a spreadsheet, conduct a capital budgeting retailer, Blades is committed to selling 180,000 pairs is not renewed, Blades will be able to sell only 5,000 pairs The Thai government will impose a 25 percent tax rate analysis for the proposed project assuming that Blades of Speedos to the retailer at a fixed price of 4,594 Thai to Entertainment Products annually but not at a fixed on income and a 10 percent withholding tax on any does not renew the agreement with Entertainment baht per pair. Once operations in Thailand commence, price. Thus, if the agreement is not renewed, Blades funds remitted by the subsidiary to Blades. Any earn- Products. Should Blades establish a subsidiary in expects to sell a total of 125,000 pairs of Speedos annu- ings remitted to the United States will not be taxed Thailand under these conditions? Should Blades renew the agreement will last another year, at which time it again. the agreement with Entertainment Products? may be renewed. Thus, during its first year of opera- ally during its first two years of operation in Thailand tions in Thailand, Blades will sell 180,000 pairs of roller and 225,000 pairs annually thereafter. Pairs not sold After 10 years, Blades expects to sell its Thai subsidiary 4. Because future economic conditions in Thailand blades to Entertainment Products under the existing for approximately 650 million baht, after considering are uncertain, Holt would like to know how critical under the contractual agreement with Entertainment any capital gains taxes. the salvage value is in the alternative you think is most agreement, whether it has operations in the country or Products will be sold for 5,000 Thai baht per pair, The average annual inflation in Thailand is expected feasible. not. If it establishes the plant in Thailand, Blades will because Entertainment Products had required a lower to be 12 percent. Unless prices are contractually fixed, produce 108,000 of the 180,000 Speedos purchased by price to compensate it for the risk of being unable to sell 5. The future value of the baht is highly uncertain. revenue, variable costs, and fixed costs are subject to Entertainment Products at the plant during the last year the pairs it purchased from Blades. inflation and are expected to change by the same Under a worst-case scenario, the baht may depreciate by as much as 5 percent annually. Revise your spread- of the agreement. Therefore, the new subsidiary would Holt wishes to analyze the financial feasibility of annual rate as the inflation rate. sheet to illustrate how this change would affect Blades' need to import 72,000 pairs of Speedos from the United establishing a subsidiary in Thailand. As Blades' finan- Blades could continue its current operations of decision to establish a subsidiary in Thailand. (Use the States so that it can accommodate its agreement with cial analyst, you have been given the task of analyz- exporting to and importing from Thailand, which have capital budgeting analysis you have identified as the Entertainment Products. It will save the equivalent of ing the proposed project. Because future economic generated a return of approximately 20 percent. Blades most favorable from questions 2 and 3 to answer this 300 baht per pair in variable costs on the 108,000 pairs conditions in Thailand are highly uncertain, Holt has requires a return of 25 percent on this project to justify question.) not previously manufactured in Thailand. also asked you to conduct some sensitivity analyses