Case 14

1. In the given scenario, sales from the existing agreement should not be included in the

capital budgeting analysis. The reason being is that Blades would have these sales with

or without the subsidiary in Thailand. The cost savings for the pairs not sourced from

Thailand should be included because these sales would not happen if Blades continued

to import from Thailand. Finally, the sales resulting from a renewed agreement should be

included in the capital budgeting analysis because this revenue is incremental to creating

2. See spreadsheet. Blades should establish the subsidiary in Thailand under the given

conditions. The capital budgeting analysis shows a positive NPV if Blades renews the

agreement with Entertainment Products and establishes the subsidiary

3. See spreadsheet. The capital budgeting analysis indicates that Blades should establish a

subsidiary and not renew its agreement. The NPV was $8,746,688

4. See spreadsheet. The salvage value is not that critical. The capital budgeting analysis in

question 2 is the most feasible alternative. As spreadsheet suggests (comparing question

3 and question 4), even if Blades salvage value is reduced to 0 (Blades does not sell the

subsidiary), the NPV remains positive.

5. See spreadsheet. The capital budgeting analysis shows a positive NPV of $5,620,315 for

the worst case scenario. Therefore, Blades should establish the subsidiary even if baht

depreciates by 5 percent annually.

Capital
Budgeting
Analysis
PROBLE
Year 0
M#2
Demand Entertain
ment
Products

Year 1

Year 2

Price per
unit - baht
Revenue
from
agreement
Other
retailers
Price per
unit - baht
Revenue
from other
retailers

Year 3

Year 4

Year 5

Year 6

Year 7

180

180

180

180

180

180

4.594

4.594

4.594

4.594

4.594

4.594

826,920,0 826,920,0 826,920,0 826,920,0 826,920,0 826,920,0

00
00
00
00
00
00

120

120

220

220

220

220

220

5.6

6.272

7.025

7.868

8.812

9.869

600,000,0 672,000,0 1,379,840, 1,545,420, 1,730,871, 1,938,575, 2,171,204,

00
00
000
800
296
852
954

Total
revenue
Variable
cost per
unit
Total
variable
cost

600,000,0 1,498,920, 2,206,760, 2,372,340, 2,557,791, 2,765,495, 2,998,124,

00
000
000
800
296
852
954

Less: cost
savings

32,400,00
0

Other
fixed
expenses

25,000,00 28,000,00 31,360,00 35,123,20 39,337,98 44,058,54 49,345,56

0
0
0
0
4
2
7

3.5

3.92

4.39

4.917

5.507

6.168

6.908

420,000,0 1,176,000, 1,756,160, 1,966,899, 2,202,927, 2,467,278, 2,763,351,

00
000
000
200
104
356
759

Depreciati
on
Total
expenses

30,000,00 30,000,00 30,000,00 30,000,00 30,000,00 30,000,00 30,000,00

0
0
0
0
0
0
0
442,600,0 1,234,000, 1,817,520, 2,032,022, 2,272,265, 2,541,336, 2,842,697,
00
000
000
400
088
899
326

EBT of
susidiary

157,400,0 264,920,0 389,240,0 340,318,4 285,526,2 224,158,9 155,427,6

00
00
00
00
08
53
27

Host
governme
nt tax
(25%)

39,350,00 66,230,00 97,310,00 85,079,60 71,381,55 56,039,73 38,856,90

0
0
0
0
2
8
7

After tax
earnings
of
subsidiary

118,050,0 198,690,0 291,930,0 255,238,8 214,144,6 168,119,2 116,570,7

00
00
00
00
56
15
20

NCF to
subsidiary

148,050,0 228,690,0 321,930,0 285,238,8 244,144,6 198,119,2 146,570,7

00
00
00
00
56
15
20

Baht
remitted
by
susidiary

148,050,0 228,690,0 321,930,0 285,238,8 244,144,6 198,119,2 146,570,7

00
00
00
00
56
15
20

Witholdin
g tax on
remitted
funds
(10%)

14,805,00 22,869,00 32,193,00 28,523,88 24,414,46 19,811,92 14,657,07

0
0
0
0
6
1
2

Baht
remitted
after
witholding
taxes
Salvage
value
Exchange
rate - baht

133,245,0 205,821,0 289,737,0 256,714,9 219,730,1 178,307,2 131,913,6

00
00
00
20
90
93
48

0.02300

CF to
parent
PV of
parent CF
(25%
discount
rate)
Initial
12,650,00
investment
0
by parent

0.02254

0.02209

0.02165

0.02121

0.02079

0.02037

0.01997

3,003,342 4,546,421 6,272,057 5,446,070 4,568,230 3,632,900 2,633,905

2,402,674 2,909,710 3,211,293 2,230,710 1,496,918

952.343

552.37

Cumulativ
e PV

PROBLE
Year 0
M#3
Demand Entertain
ment
Products

10,247,32 -7,337,617 -4,126,323 -1,895,613

6

Year 1

Year 2

Price per
unit - baht
Revenue
from
agreement
Other
retailers
Price per
unit - baht
Revenue
from other
retailers

Year 3

Year 4

-398.695

Year 5

553.648 1,106,018

Year 6

Year 7

5.6

6.272

7.025

7.868

8.812

9.869

28,000,00 31,360,00 35,123,20 39,337,98 44,058,54 49,345,56

0
0
0
4
2
7

120

120

220

220

220

220

220

5.6

6.272

7.025

7.868

8.812

9.869

600,000,0 672,000,0 1,379,840, 1,545,420, 1,730,871, 1,938,575, 2,171,204,

00
00
000
800
296
852
954

Total
revenue
Variable
cost per
unit
Total
variable
cost

600,000,0 700,000,0 1,411,200, 1,580,544, 1,770,209, 1,982,634, 2,220,550,

00
00
000
000
280
394
521

Less: cost
savings

32,400,00
0

Other
fixed
expenses
Depreciati
on
Total
expenses
EBT of
susidiary

3.5

3.92

4.39

4.917

5.507

6.168

6.908

420,000,0 490,000,0 987,840,0 1,106,380, 1,239,146, 1,387,844, 1,554,385,

00
00
00
800
496
076
365

25,000,00 28,000,00 31,360,00 35,123,20 39,337,98 44,058,54 49,345,56

0
0
0
0
4
2
7
30,000,00 30,000,00 30,000,00 30,000,00 30,000,00 30,000,00 30,000,00
0
0
0
0
0
0
0
442,600,0 548,000,0 1,049,200, 1,171,504, 1,308,484, 1,461,902, 1,633,730,
00
00
000
000
480
618
932
157,400,0 152,000,0 362,000,0 409,040,0 461,724,8 520,731,7 586,819,5
00
00
00
00
00
76
89

Host
governme
nt tax
(25%)

39,350,00 38,000,00 90,500,00 102,260,0 115,431,2 130,182,9 146,704,8

0
0
0
00
00
44
97

After tax
earnings
of
subsidiary

118,050,0 114,000,0 271,500,0 306,780,0 346,293,6 390,548,8 440,114,6

00
00
00
00
00
32
92

NCF to
subsidiary

148,050,0 144,000,0 301,500,0 336,780,0 376,293,6 420,548,8 470,114,6

00
00
00
00
00
32
92

Baht
remitted
by
susidiary

148,050,0 144,000,0 301,500,0 336,780,0 376,293,6 420,548,8 470,114,6

00
00
00
00
00
32
92

Witholdin
g tax on
remitted
funds
(10%)

14,805,00 14,400,00 30,150,00 33,678,00 37,629,36 42,054,88 47,011,46

0
0
0
0
0
3
9

Baht
remitted
after
witholding
taxes
Salvage
value
Exchange
rate - baht

133,245,0 129,600,0 271,350,0 303,102,0 338,664,2 378,493,9 423,103,2

00
00
00
00
40
49
23

0.02300

CF to
parent
PV of
parent CF
(25%
discount
rate)

0.02254

0.02209

0.02165

0.02121

0.02079

0.02037

0.01997

3,003,342 2,862,760 5,874,026 6,430,148 7,040,890 7,711,578 8,448,054

2,402,674 1,832,167 3,007,501 2,633,788 2,307,159 2,021,544 1,771,685

Initial
12,650,00
investment
0
by parent
Cumulativ
e PV

PROBLE
Year 0
M#4

10,247,32 -8,415,160 -5,407,658 -2,773,870

6

Year 1

Year 2

Year 3

Year 4

-466.711 1,554,833 3,326,518

Year 5

Year 6

Year 7

Demand Entertain
ment
Products

Price per
unit - baht

5.6

6.272

7.025

7.868

8.812

9.869

Revenue
from
agreement
Other
retailers
Price per
unit - baht
Revenue
from other
retailers

28,000,00 31,360,00 35,123,20 39,337,98 44,058,54 49,345,56

0
0
0
4
2
7

120

120

220

220

220

220

220

5.6

6.272

7.025

7.868

8.812

9.869

600,000,0 672,000,0 1,379,840, 1,545,420, 1,730,871, 1,938,575, 2,171,204,

00
00
000
800
296
852
954

Total
revenue
Variable
cost per
unit
Total
variable
cost

600,000,0 700,000,0 1,411,200, 1,580,544, 1,770,209, 1,982,634, 2,220,550,

00
00
000
000
280
394
521

Less: cost
savings

32,400,00
0

Other
fixed
expenses
Depreciati
on
Total
expenses
EBT of
susidiary
Host
governme
nt tax
(25%)
After tax
earnings
of
subsidiary

3.5

3.92

4.39

4.917

5.507

6.168

6.908

420,000,0 490,000,0 987,840,0 1,106,380, 1,239,146, 1,387,844, 1,554,385,

00
00
00
800
496
076
365

25,000,00 28,000,00 31,360,00 35,123,20 39,337,98 44,058,54 49,345,56

0
0
0
0
4
2
7
30,000,00 30,000,00 30,000,00 30,000,00 30,000,00 30,000,00 30,000,00
0
0
0
0
0
0
0
442,600,0 548,000,0 1,049,200, 1,171,504, 1,308,484, 1,461,902, 1,633,730,
00
00
000
000
480
618
932
157,400,0 152,000,0 362,000,0 409,040,0 461,724,8 520,731,7 586,819,5
00
00
00
00
00
76
89
39,350,00 38,000,00 90,500,00 102,260,0 115,431,2 130,182,9 146,704,8
0
0
0
00
00
44
97

118,050,0 114,000,0 271,500,0 306,780,0 346,293,6 390,548,8 440,114,6

00
00
00
00
00
32
92

NCF to
subsidiary

148,050,0 144,000,0 301,500,0 336,780,0 376,293,6 420,548,8 470,114,6

00
00
00
00
00
32
92

Baht
remitted
by
susidiary

148,050,0 144,000,0 301,500,0 336,780,0 376,293,6 420,548,8 470,114,6

00
00
00
00
00
32
92

Witholdin
g tax on
remitted
funds
(10%)

14,805,00 14,400,00 30,150,00 33,678,00 37,629,36 42,054,88 47,011,46

0
0
0
0
0
3
9

Baht
remitted
after
witholding
taxes
Salvage
value
Exchange
rate - baht

133,245,0 129,600,0 271,350,0 303,102,0 338,664,2 378,493,9 423,103,2

00
00
00
00
40
49
23

0.02300

CF to
parent
PV of
parent CF
(25%
discount
rate)

0.02254

0.02209

0.02165

0.02121

0.02079

0.02037

0.01997

3,003,342 2,862,760 5,874,026 6,430,148 7,040,890 7,711,578 8,448,054

2,402,674 1,832,167 3,007,501 2,633,788 2,307,159 2,021,544 1,771,685

Initial
12,650,00
investment
0
by parent
Cumulativ
e PV

PROBLE
Year 0
M#5
Demand Entertain
ment
Products
Price per
unit - baht

10,247,32 -8,415,160 -5,407,658 -2,773,870

6

Year 1

Year 2

Year 3

Year 4

-466.711 1,554,833 3,326,518

Year 5

Year 6

Year 7

5.6

6.272

7.025

7.868

8.812

9.869

Revenue
from
agreement
Other
retailers
Price per
unit - baht
Revenue
from other
retailers

28,000,00 31,360,00 35,123,20 39,337,98 44,058,54 49,345,56

0
0
0
4
2
7

120

120

220

220

220

220

220

5.6

6.272

7.025

7.868

8.812

9.869

600,000,0 672,000,0 1,379,840, 1,545,420, 1,730,871, 1,938,575, 2,171,204,

00
00
000
800
296
852
954

Total
revenue
Variable
cost per
unit
Total
variable
cost

600,000,0 700,000,0 1,411,200, 1,580,544, 1,770,209, 1,982,634, 2,220,550,

00
00
000
000
280
394
521

Less: cost
savings

32,400,00
0

Other
fixed
expenses
Depreciati
on
Total
expenses
EBT of
susidiary
Host
governme
nt tax
(25%)

3.5

3.92

4.39

4.917

5.507

6.168

6.908

420,000,0 490,000,0 987,840,0 1,106,380, 1,239,146, 1,387,844, 1,554,385,

00
00
00
800
496
076
365

25,000,00 28,000,00 31,360,00 35,123,20 39,337,98 44,058,54 49,345,56

0
0
0
0
4
2
7
30,000,00 30,000,00 30,000,00 30,000,00 30,000,00 30,000,00 30,000,00
0
0
0
0
0
0
0
442,600,0 548,000,0 1,049,200, 1,171,504, 1,308,484, 1,461,902, 1,633,730,
00
00
000
000
480
618
932
157,400,0 152,000,0 362,000,0 409,040,0 461,724,8 520,731,7 586,819,5
00
00
00
00
00
76
89
39,350,00 38,000,00 90,500,00 102,260,0 115,431,2 130,182,9 146,704,8
0
0
0
00
00
44
97

After tax
earnings
of
subsidiary

118,050,0 114,000,0 271,500,0 306,780,0 346,293,6 390,548,8 440,114,6

00
00
00
00
00
32
92

NCF to
subsidiary

148,050,0 144,000,0 301,500,0 336,780,0 376,293,6 420,548,8 470,114,6

00
00
00
00
00
32
92

Baht
remitted
by
susidiary

148,050,0 144,000,0 301,500,0 336,780,0 376,293,6 420,548,8 470,114,6

00
00
00
00
00
32
92

Witholdin
g tax on
remitted
funds
(10%)

14,805,00 14,400,00 30,150,00 33,678,00 37,629,36 42,054,88 47,011,46

0
0
0
0
0
3
9

Baht
remitted
after
witholding
taxes
Salvage
value
Exchange
rate - baht

133,245,0 129,600,0 271,350,0 303,102,0 338,664,2 378,493,9 423,103,2

00
00
00
00
40
49
23

0.02300

CF to
parent
PV of
parent CF
(25%
discount
rate)

0.02185

0.02076

0.01972

0.01873

0.01780

0.01691

0.01606

2,911,403 2,690,172 5,350,920 5,678,205 6,027,194 6,399,240 6,795,781

2,329,123 1,721,710 2,739,671 2,325,793 1,974,991 1,677,522 1,425,179

Initial
12,650,00
investment
0
by parent
Cumulativ
e PV

10,320,87 -8,599,167 -5,859,496 -3,533,703 -1,558,712

7

118.81 1,543,989

Year 8

Year 9

Year 10

180

180

180

4.594

4.594

4.594

826,920,0 826,920,0 826,920,0

00
00
00
220

220

220

11.053

12.38

13.865

2,431,749, 2,723,559, 3,050,386,

548
494
633
3,258,669, 3,550,479, 3,877,306,
548
494
633
7.737

8.666

9.706

3,094,953, 3,466,348, 3,882,310,

970
447
260

55,267,03 61,899,07 69,326,96

5
9
9

30,000,00 30,000,00 30,000,00

0
0
0
3,180,221, 3,558,247, 3,981,637,
006
526
229
78,448,54
-7,768,032 104,330,5
3
96
19,612,13
-1,942,008 26,082,64
6
9

58,836,40
-5,826,024 78,247,94
7
7
88,836,40 24,173,97
48,247,94
7
6
7
88,836,40 24,173,97
48,247,94
7
6
7

8,883,641 2,417,398 -4,824,795

79,952,76 21,756,57
43,423,15
6
8
2
650,000,0
00
0.01957

0.01918

0.01879

1,564,480

417.208

11,399,20
1

262.476

55.997 1,223,980

1,368,494 1,424,490 2,648,470

Year 8

Year 9

Year 10

11.053

12.38

13.865

55,267,03 61,899,07 69,326,96

5
9
9
220

220

220

11.053

12.38

13.865

2,431,749, 2,723,559, 3,050,386,

548
494
633
2,487,016, 2,785,458, 3,119,713,
583
573
602
7.737

8.666

9.706

1,740,911, 1,949,821, 2,183,799,

608
001
521

55,267,03 61,899,07 69,326,96

5
9
9
30,000,00 30,000,00 30,000,00
0
0
0
1,826,178, 2,041,720, 2,283,126,
644
081
490
660,837,9 743,738,4 836,587,1
40
93
12

165,209,4 185,934,6 209,146,7

85
23
78

495,628,4 557,803,8 627,440,3

55
69
34

525,628,4 587,803,8 657,440,3

55
69
34
525,628,4 587,803,8 657,440,3
55
69
34

52,562,84 58,780,38 65,744,03

5
7
3

473,065,6 529,023,4 591,696,3

09
82
00
650,000,0
00
0.01957
9,256,735

0.01918

0.01879

10,144,65 23,334,79
9
4

1,553,022 1,361,593 2,505,554

4,879,541 6,241,134 8,746,688

Year 8

Year 9

Year 10

11.053

12.38

13.865

55,267,03 61,899,07 69,326,96

5
9
9
220

220

220

11.053

12.38

13.865

2,431,749, 2,723,559, 3,050,386,

548
494
633
2,487,016, 2,785,458, 3,119,713,
583
573
602
7.737

8.666

9.706

1,740,911, 1,949,821, 2,183,799,

608
001
521

55,267,03 61,899,07 69,326,96

5
9
9
30,000,00 30,000,00 30,000,00
0
0
0
1,826,178, 2,041,720, 2,283,126,
644
081
490
660,837,9 743,738,4 836,587,1
40
93
12
165,209,4 185,934,6 209,146,7
85
23
78

495,628,4 557,803,8 627,440,3

55
69
34

525,628,4 587,803,8 657,440,3

55
69
34
525,628,4 587,803,8 657,440,3
55
69
34

52,562,84 58,780,38 65,744,03

5
7
3

473,065,6 529,023,4 591,696,3

09
82
00

0
0.01957
9,256,735

0.01918

0.01879

10,144,65 11,119,55
9
6

1,553,022 1,361,593 1,193,953

4,879,541 6,241,134 7,435,087

Year 8

Year 9

Year 10

11.053

12.38

13.865

55,267,03 61,899,07 69,326,96

5
9
9
220

220

220

11.053

12.38

13.865

2,431,749, 2,723,559, 3,050,386,

548
494
633
2,487,016, 2,785,458, 3,119,713,
583
573
602
7.737

8.666

9.706

1,740,911, 1,949,821, 2,183,799,

608
001
521

55,267,03 61,899,07 69,326,96

5
9
9
30,000,00 30,000,00 30,000,00
0
0
0
1,826,178, 2,041,720, 2,283,126,
644
081
490
660,837,9 743,738,4 836,587,1
40
93
12
165,209,4 185,934,6 209,146,7
85
23
78

495,628,4 557,803,8 627,440,3

55
69
34

525,628,4 587,803,8 657,440,3

55
69
34
525,628,4 587,803,8 657,440,3
55
69
34

52,562,84 58,780,38 65,744,03

5
7
3

473,065,6 529,023,4 591,696,3

09
82
00
650,000,0
00
0.01526

0.01450

0.01377

7,218,352 7,668,585

17,099,33
7

1,211,039 1,029,260 1,836,027

2,755,027 3,784,287 5,620,315

Case 9

1. There are several ways Blades can benefit. Blades generates baht-denominated cash
inflows and then converts them to U.S. dollars. Forecasting the exchange rate may allow
Blades to make hedging decisions. Furthermore, it is mentioned that Blades may establish
a subsidiary in Thailand. If this was to happen, profits earned by this subsidiary will be
in baht. These earnings will then be sent back to the parent or reinvested in Thailand. In
both scenarios forecasting exchange rate is vital for companys future.
2. A market-based forecast is the easiest to use because it is based on either spot rate or the
forward rate. In this case it would be better to use forward rates.
3. The forward rates would yield a better market-based forecast. It is said that the available
forward rates currently exhibit a large discount, which implies higher interest rate, which
then implies higher inflation. Higher inflation is associated with a downward pressure on
the baht, which is a valid forecast. Using the present spot rate to forecast future spot rate
would mean that the value of the baht would not fluctuate, which is not likely to happen.
4.
market-based forecast By using the forward rate market-based forecast it is shown that baht is expected to
change by -8.70 percent. The value of the baht in 90 days according to this forecast will
-0.08696
be $0.021.
5. Weekly accuracy of technical forecast indicates market inefficiency for the baht-dollar
exchange rates. Technical forecasting involves the use of historical exchange rate data to
predict future rates and mostly apply to very shot-term periods such as one day. Given

the conditions Thailand is in, examination of past movements will not be useful for
indicating future rates.
6.
fundamental forecast The expected change using the fundamental forecast is -6.85 percent.
-0.0685
forecasted value of the baht The forecasted value of the baht using the expected value as the forecast is $.0214.
absolute error- technical forecasting absolute error- fundamental forecasting absolute error- market-based forecasting 0.021425
-0.01727
-0.02614
-0.04545
The absolute forecast errors are as follows: technical forecasting 1.73%; fundamental
forecasting 2.61%; and the market-based forecast 4.54%. Observing given forecasting
techniques and their absolute errors the conclusion arises that the most accurate technique
is the technical forecasting.
7. It will not. As mentioned earlier, technical forecasting involves the use of historical
exchange rate data to predict future rates. Examination of past movements will
most likely not be as useful for indicating future rates in Thailand. There are a lot of
uncertainties when it comes to exchange rates in this country. There is a high volatility
of the baht-dollar exchange rate. In addition, Thai economy is experiencing unfavorable
conditions that will have an affect on exchange rates.