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 bladesInc. 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 only72,000 pairs of Speedos from Thailand due to their excellent Quality & costdifferentiation, remaining material for 108000 pairs are purchased from home country.The revenue generated from export to Thailand is stable however cost of goods soldkeeps 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 askedthe analyst to give reasons for denying the proposal.
One point of concern for you is that there is a tradeoff between higher interest rates inThailand and the delayed conversion of Baht into dollars. Explain what this means?
As a principle of investment we should invest there where the interest rates are highand currency appreciates. So according to this principle the company should invest itsexcessive funds in Thailand as the interest rates are high over there but this interest rate ishigh due to economic instability so it means if we take the benefit of increased interestrates we have to delay the investment for one year. If the company invests in USA it willget the money immediately but at a lower interest rate & this is a tradeoff between thecurrency and the interest rates.
If the net Baht received from the Thailand operations are invested in Thailand, how willUS operations be affected? (Assume that Blades is currently paying 10% on dollar borrowed and needs more financing for its firm)