Q1) The sales from the existing agreement should not be included in the capital

budgeting analysis in deciding whether Blades should establish a subsidiary in Thailand or

not. Blades will generate these sales whether or not it establishes a subsidiary in Thailand.
The cost savings of 325 Thai baht per pair of roller blades for the 225,000 pairs not
previously sourced from Thailand should be included in the capital budgeting analysis, as
these savings would not occur if Blades continued to import from Thailand. The sales
resulting from the renewed agreement should be included in the capital budgeting analysis,
because Entertainment Products will not renew the agreement if Blades continues to export
to Thailand. Thus, this revenue is incremental to the establishment of a subsidiary.

Q2) The spreadsheet shows a positive net present value (NPV) of 47,587,030 USD if
Blades establishes a subsidiary in Thailand and renews the agreement with Entertainment
Products. Thus, Blades should accept the project assuming that the rate of return of 23% is
fully accounted for.

Q3) The spreadsheet shows a positive NPV of 51,946,680 USD if Blades establishes a
subsidiary in Thailand and does not renew the agreement with Entertainment Products. The
higher NPV is attributable to the fact that Blades' sales to Entertainment Products are now
tied to inflation, even though they are reduced by 218,000 units annually. Thus, Blades
should probably not renew its agreement with Entertainment Products.

Q4) The capital budgeting analysis in question 3 was the most favourable. Under this
scenario, even if Blades is unable to sell the subsidiary, the NPV of the project is positive.
Thus, the salvage value is not critical for making this project feasible.

Q5) The spreadsheet shows that an annual depreciation of 4 percent of the Thai baht will
result in a positive NPV. Since this is a worst case scenario, Blades should still establish a
subsidiary in Thailand (without renewing its agreement with Entertainment Products) even if
it expects the baht to depreciate by 4 percent annually.