Blades Inc Finance Case Study

There is a Blades, Inc. Case located at the end of every chapter. It is helpful if the team members review all of the cases for Chapters 13 through 15, so that the team has a full picture of the case conditions. For completion no later than the last day of Unit 5, each team will prepare and complete the Blades, Inc. Case in Chapter 15, pages 472-4, and will answer all of the questions at the end of the case.

1. Using a spreadsheet, determine the NPV of the acquisition of Skates'n'Stuff. Based on your numerical analysis, should Blades establish a subsidiary in Thailand or acquire Skates'n'Stuff?

NPVa = -IOa + Σnt=1 CFa.t + SVa

(1 + k)t (1 + k)n

"The analysis (below) indicates that the acquisition will result in a net present value (NPV) of $6,641,949 to Blades, Inc. after accounting for the cost of the acquisition. Thus, the establishment of a new subsidiary in Thailand would be more profitable by $8,746,688 - $6,641,949 = $2,104,739.

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10

1. Units Sold to Retailers in Thailand

280,000 280,000 280,000 280,000 280,000 280,000 280,000 280,000 280,000 280,000 280,000

2. Price per Unit (in Thai baht)

4,500 5,040 5,645 6,322 7,081 7,931 8,882 9,948 11,142 12,479 13,976

3. Revenue from Sales to Retailers in Thailand = (1) × (2) (in 000s)

1,260,000 1,411,200 1,580,544 1,770,209 1,982,634 2,220,551 2,487,017 2,785,459 3,119,714 3,494,079 3,913,369

4. Variable Cost per Unit (in Thai baht)

3,500 3,920 4,390 4,917 5,507 6,168 6,908 7,737 8,666 9,706 10,870

5. Total Variable Cost = (1) × (4) (in 000s)

980,000 1,097,600 1,229,312 1,376,829 1,542,049 1,727,095 1,934,346 2,166,468 2,426,444 2,717,617 3,043,731

6. Less Cost Savings from Production of 108,000 Pairs in Thailand (000s)

32, 400 32,4 00 -- -- -- -- -- -- -- -- --

7. Fixed Operating Expenses (in Thai baht 000s)

20, 000 22,4 00 25,0 88 28,0 99 31,4 70 35,2 47 39,4 76 44,2 14 49,5 19 55,4 62 62,11 7

8. Noncash Expense (Depreciation in baht 000s)

60,000 60,000 60,000 60,000 60,000 60,000 60,000 60,000 60,000 60,000 60,000

9. Total Expenses = (5) - (6) + (7) + (8) (in baht 000s)

1,027,600 1,147,600 1,314,400 1,464,928 1,633,519 1,822,342 2,033,823 2,270,681 2,535,963 2,833,079 3,165,848

10. Before-Tax Earnings of Subsidiary = (3) - (9) (in baht 000s)

232, 400 263,6 00 266,1 44 305,2 81 349,1 15 398,2 09 453,1 94 514,7 77 583,7 50 661,0 00 747,52 1

11. Host Government Tax (25%) (in 000s)

58,100 65,900 66,536 76,320 87,279 99,552 113,298 128,694 145,938 165,250 186,880

12. After-Tax Earnings of Subsidiary

174,300 197,700 199,608 228,961 261,836 298,657 339,895 386,083 437,813 495,750 560,640

13. Net Cash Flow to Subsidiary = (12) + (8) (in baht 000s)

234,300 257,700 259,608 288,961 321,836 358,657 399,895 446,083 497,813 555,750 620,640

14. Thai Baht Remitted by Subsidiary (100% of CF) (in baht 000s)

234, 300 257,7 00 259,6 08 288,9 61 321,8 36 358,6 57 399,8 95 446,0 83 497,8 13 555,7 50 620,64 0

15. Withholding Tax on Remitted Funds (10%) (in baht 000s)

23,430 25,770 25,961 28,896 32,184 35,866 39,990 44,608 49,781 55,575 62,064

16. Thai Baht Remitted After Withholding Taxes (in 000s)

210,87 0 231,930 233,647 260,065 289,653 322,791 359,906 401,475 448,032 500,175 558,576