Blades Inc Case of IFM
Transcript of Blades Inc Case of IFM
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OVERVIEW
This case study was about a company named blades incorporation who was involved in a business of exporting Speedos “Rollers blades” to Thailand .It was not difficult for blades Inc. to generate minimum revenue of 180,000 pairs of Speedos annually with a fixed price of THB4, 594 per pair. Blades Inc import raw material rubber & plastic of only 72,000 pairs of Speedos from Thailand due to their excellent Quality & cost differentiation, remaining material for 108000 pairs are purchased from home country.
The revenue generated from export to Thailand is stable however cost of goods sold keeps on changing. The company has two options o invest the revenues
One is to enhance the production of Speedos Other is to invest in U.S.
Ben Holt the CFO of the Blades Inc.takes in account to invest the excessive funds either in USA at 8% interest rate or in Thailand at 15 %.( due to unstable economy).CFO asked the analyst to give reasons for denying the proposal.
Q#1
One point of concern for you is that there is a tradeoff between higher interest rates in Thailand and the delayed conversion of Baht into dollars. Explain what this means?
Ans: As a principle of investment we should invest there where the interest rates are high and currency appreciates. So according to this principle the company should invest its excessive funds in Thailand as the interest rates are high over there but this interest rate is high due to economic instability so it means if we take the benefit of increased interest rates we have to delay the investment for one year. If the company invests in USA it will get the money immediately but at a lower interest rate & this is a tradeoff between the currency and the interest rates.
Q#2
If the net Baht received from the Thailand operations are invested in Thailand, how will US operations be affected? (Assume that Blades is currently paying 10% on dollar borrowed and needs more financing for its firm)
Ans:
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Working
Revenue 180,000*4594 = THB 826920000
CGS 72000*2871 = THB 206712000
Net Revenue from Thailand =THB 620208000
These net revenues received from thailand if again invested in thaliand instead of USA then as it has already done financing form USA @ 10% so it would need further loan to continue the operartions in USA.
Q#3 Costruct a spreadshhet to compare the cashflows rsulting from 2 plans.For this question assume that allaa baht denominated cash flows are due today.compare the choice of investing the funds versus using the funds to provide needed financing to the firm?
Ans: Delayed conversion
F.V = P.V (1+i)n
=62028000 (1+0.15)1
=THB713239200
Now multiplying with exchange rate =THB 713239200 * 0.022
After converting in $=$ 15691262
Immediate conversion
Multiplying with exchange rate
=THB620208000 * 0.024
After converting into $ =$ 14884992
F.V = P.V (1+i)n
F.V= 14884992 (1 + .08)
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F.V after 1 year=$1607579
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