need help with 3-5

BLADEs, Inc. CASE Decision by Blades, Inc., to Invest in Thailand Because Ben Holt, Blades' chief financial officer, Entertainment Products has already declared believes the growth potential for the roller blade market willingness to renew the agreement for another the in Thailand is very high, he has decided to invest in years under identical terms. Because of recent deliver Thailand. The investment would involve establishing delays, however, it is willing to renew the agreem a subsidiary in Bangkok consisting of a manufacturing only if Blades has operations in Thailand. Moreover plant to produce Speedos, Blades' high-quality roller if Blades has a subsidiary in Thailand, Entertainment blades. Holt believes that economic conditions in Thai- Products will keep renewing the existing agreements land will be relatively strong in 10 years, when he long as Blades operates in Thailand. If the agreements expects to sell the subsidiary. renewed, Blades expects to sell a total of 300,000 pairs Blades will continue exporting to the United King of Speedos annually during its first two years of opera dom under an existing agreement with Jogs, Ltd., a tion in Thailand to various retailers, including 180,000 British retailer. Furthermore, it will continue its pairs to Entertainment Products. After this time, it sales in the United States. Under an existing agree expects to sell 400,000 pairs annually including ment with Entertainment Products, Inc., a Thai 180,000 to Entertainment Products). If the agreement retailer, Blades is committed to selling 180,000 pairs is not renewed, Blades will be able to sell only of Speedos to the retailer at a fixed price of 4,594 Thai pairs to Entertainment Products annually but no baht per pair. Unce operations in Thailand com- fixed price. Thus if the agreement is not om mence, the agreement will last another year, at Blades expects to sell a total of 125,000 pairs of which time it may be renewed. Thus, during its first annually during its first two years of operation in year of operations in Thailand, Blades will sell land and 225,000 pairs annually thereafter. Pa 180,000 pairs of roller blades to Entertainment Pro- sold under the contractual agreement with En ducts under the existing agreement whether it has ment Products will be sold for 5.000 Thai baht po operations in the country or not. If it establishes the because Entertainment Products had required plant in Thailand, Blades will produce 108,000 of the price to compensate it for the risk of being 180.000 Entertainment Products Speedos at the plant sell the pairs it purchased from Blades. during the last year of the agreement. Therefore, the Holt wishes to analyze the financial new subsidiary would need to import 72,000 pairs of establishing a subsidiary in Thailand. As Speedos from the United States so that it can accom- financial analyst, you have been given the financial modate its agreement with Entertainment Products. lyzing the proposed project. Because fut lyzing the ne It will save the equivalent or ant per pair in conditions in Thailand are highly uncen variable costs on the 108,000 pairs not previously also asked you to conduct some sensiti manufactured in Thailand. Fortunately, he has provided most of the Thai baht per puit Id required a lower of being unable hancial feasibility kind. As a Blads en the task of an duse future acona Uncertain, Haltbes e sensitivity analisa of the informatie o conduct a capital budgeting analysis. This you need to cond information is de 1 The building million Thai ba baht, will be deprec mation is detailed here: building and equipment needed will cost 550 Thai baht. This amount includes additional funds to support working capital. plant and equipment, valued at 300 million will be depreciated using straight-line depreci- Thus 30 million baht will be depreciated annually for 10 years. e variable costs needed to manufacture Speedos are estimated to be 3,500 baht per pair next year. Blades' fixed operating expenses, such as adminis- trative salaries, will be 25 million baht next year. 1 The current spot exchange rate of the Thai baht is $ .023. Blades expects the baht to depreciate by an average of 2 percent per year for the next 10 years. 1 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 subsidi- ary. It expects to sell the subsidiary for about 650 mil- lion baht, after considering any capital gains taxes. The average annual inflation in Thailand is expected obe 12 percent. Unless prices are contractually Tuxed, revenue, variable costs, and fixed cost ject to inflation and are expected to change by same annual rate as the inflation rate. order to justify its 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: 1. 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? 2. 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? 3. 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? 4. Because future economic conditions in Thailand are uncertain, Holt would like to know how critical the sal- vage value is in the alternative you think is most feasible. 5. The future value of the baht is highly uncertain. Under a worst-case scenario, the baht may depreciate by as much as 5 percent annually. Revise your spreadsheet to illustrate how this would affect Blades' decision to estab- lish a subsidiary in Thailand. (Use the capital budgeting Blades could co nue its current operations of analysis you have identified as the most favorable from questions 2 and 3 to answer this question.) bare generated a return o Tequires a return "8 to and importing from Thailand, W a a return of about 20 percent. Blades return of 25 percent on this project in BLADEs, Inc. CASE Decision by Blades, Inc., to Invest in Thailand Because Ben Holt, Blades' chief financial officer, Entertainment Products has already declared believes the growth potential for the roller blade market willingness to renew the agreement for another the in Thailand is very high, he has decided to invest in years under identical terms. Because of recent deliver Thailand. The investment would involve establishing delays, however, it is willing to renew the agreem a subsidiary in Bangkok consisting of a manufacturing only if Blades has operations in Thailand. Moreover plant to produce Speedos, Blades' high-quality roller if Blades has a subsidiary in Thailand, Entertainment blades. Holt believes that economic conditions in Thai- Products will keep renewing the existing agreements land will be relatively strong in 10 years, when he long as Blades operates in Thailand. If the agreements expects to sell the subsidiary. renewed, Blades expects to sell a total of 300,000 pairs Blades will continue exporting to the United King of Speedos annually during its first two years of opera dom under an existing agreement with Jogs, Ltd., a tion in Thailand to various retailers, including 180,000 British retailer. Furthermore, it will continue its pairs to Entertainment Products. After this time, it sales in the United States. Under an existing agree expects to sell 400,000 pairs annually including ment with Entertainment Products, Inc., a Thai 180,000 to Entertainment Products). If the agreement retailer, Blades is committed to selling 180,000 pairs is not renewed, Blades will be able to sell only of Speedos to the retailer at a fixed price of 4,594 Thai pairs to Entertainment Products annually but no baht per pair. Unce operations in Thailand com- fixed price. Thus if the agreement is not om mence, the agreement will last another year, at Blades expects to sell a total of 125,000 pairs of which time it may be renewed. Thus, during its first annually during its first two years of operation in year of operations in Thailand, Blades will sell land and 225,000 pairs annually thereafter. Pa 180,000 pairs of roller blades to Entertainment Pro- sold under the contractual agreement with En ducts under the existing agreement whether it has ment Products will be sold for 5.000 Thai baht po operations in the country or not. If it establishes the because Entertainment Products had required plant in Thailand, Blades will produce 108,000 of the price to compensate it for the risk of being 180.000 Entertainment Products Speedos at the plant sell the pairs it purchased from Blades. during the last year of the agreement. Therefore, the Holt wishes to analyze the financial new subsidiary would need to import 72,000 pairs of establishing a subsidiary in Thailand. As Speedos from the United States so that it can accom- financial analyst, you have been given the financial modate its agreement with Entertainment Products. lyzing the proposed project. Because fut lyzing the ne It will save the equivalent or ant per pair in conditions in Thailand are highly uncen variable costs on the 108,000 pairs not previously also asked you to conduct some sensiti manufactured in Thailand. Fortunately, he has provided most of the Thai baht per puit Id required a lower of being unable hancial feasibility kind. As a Blads en the task of an duse future acona Uncertain, Haltbes e sensitivity analisa of the informatie o conduct a capital budgeting analysis. This you need to cond information is de 1 The building million Thai ba baht, will be deprec mation is detailed here: building and equipment needed will cost 550 Thai baht. This amount includes additional funds to support working capital. plant and equipment, valued at 300 million will be depreciated using straight-line depreci- Thus 30 million baht will be depreciated annually for 10 years. e variable costs needed to manufacture Speedos are estimated to be 3,500 baht per pair next year. Blades' fixed operating expenses, such as adminis- trative salaries, will be 25 million baht next year. 1 The current spot exchange rate of the Thai baht is $ .023. Blades expects the baht to depreciate by an average of 2 percent per year for the next 10 years. 1 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 subsidi- ary. It expects to sell the subsidiary for about 650 mil- lion baht, after considering any capital gains taxes. The average annual inflation in Thailand is expected obe 12 percent. Unless prices are contractually Tuxed, revenue, variable costs, and fixed cost ject to inflation and are expected to change by same annual rate as the inflation rate. order to justify its 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: 1. 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? 2. 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? 3. 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? 4. Because future economic conditions in Thailand are uncertain, Holt would like to know how critical the sal- vage value is in the alternative you think is most feasible. 5. The future value of the baht is highly uncertain. Under a worst-case scenario, the baht may depreciate by as much as 5 percent annually. Revise your spreadsheet to illustrate how this would affect Blades' decision to estab- lish a subsidiary in Thailand. (Use the capital budgeting Blades could co nue its current operations of analysis you have identified as the most favorable from questions 2 and 3 to answer this question.) bare generated a return o Tequires a return "8 to and importing from Thailand, W a a return of about 20 percent. Blades return of 25 percent on this project in