International Capital Budgeting Case Study Analysis - Brunei

This case study examines Blooming Blueberries Inc.'s potential investment in a distribution center in Brunei. The analysis includes calculating the Net Present Value (NPV) of the project, considering projected exchange rates between Canadian and Bruneian currencies over six years. The study also identifies the exchange rate risk exposure and other risk factors, such as political instability, that the company must consider. The solution determines the company should not invest in the distribution center in Brunei. The document assesses the financial viability of the project, evaluating the impact of currency fluctuations and other economic factors on the investment's profitability. The analysis provides a comprehensive overview of the financial considerations involved in international capital budgeting, offering valuable insights for students studying finance and business management.

Running head: INTERNATIONAL CAPITAL BUDGETING CASE
International Capital Budgeting Case
Name of the Student:
Name of the University:
Author Note

1INTERNATIONAL CAPITAL BUDGETING CASE
Table of Contents
1. Detecting the expected spot Canadian/Bruneian exchange rates over the next six years,
while stating whether the prediction is favourable:...................................................................2
2. Determining the NPV of the project, while suggesting the use of Home Currency:.............2
3. Determining the exchange risk exposure risk that company needs to consider before
investing in the project:..............................................................................................................3
4. Identifying the other risk factors that needs to be considered by the company beside
exchange rate risk:......................................................................................................................4
5. Mentioning about the decisions of Barry:..............................................................................4
6. Stating whether the company should invest in the distribution centre in Brunei:.................4
References:.................................................................................................................................5

2INTERNATIONAL CAPITAL BUDGETING CASE
1. Detecting the expected spot Canadian/Bruneian exchange rates over the next six
years, while stating whether the prediction is favourable:
Year Canada
Brune
i Currency value
2015 1.80% 1.00% 1.14080
2016 1.80% 1.00% 1.13167
2017 1.70% 1.00% 1.12375
2018 1.70% 1.00% 1.11589
2019 1.60% 0.90% 1.10807
2020 1.80% 0.90% 1.09810
The above table provides information regarding the 6-year future prediction for the
currency conversion rate between Canada and Bruneian currency. The calculation has mainly
indicated that the values of Bruneian currency would mainly decline in near future due to the
reduction in the inflation rate, as compared to Canada. Therefore, currency value declined,
which would increase cost for the shipping expense and reduce the benefits from the project
that would be generated over the period of six years. Thus, it could be understood that the
prediction is not favourable for Blooming Blueberries Inc.
2. Determining the NPV of the project, while suggesting the use of Home Currency:
Particulars 0 1 2 3 4 5 6
Estimated
demand
(pounds) 300,000 315,000 330,750 347,288 364,652 382,884
Sale price 5.05 5.10 5.15 5.20 5.25 5.30
Variable price 1.01 1.02 1.03 1.04 1.05 1.06
Gross profit
1,212,00
0
1,285,32
6
1,363,08
8
1,445,55
5
1,531,49
3
1,622,54
1
Fixed costs per
year 200,000 200,000 200,000 200,000 200,000 200,000
Shipping per
year 114,080 113,167 112,375 111,589 110,807 109,810
Depreciation 200,000 200,000 200,000 200,000 200,000 200,000

3INTERNATIONAL CAPITAL BUDGETING CASE
PBT 697,920 772,159 850,713 933,966
1,020,68
6
1,112,73
0
Tax 209,376 231,648 255,214 280,190 306,206 333,819
PAT 488,544 540,511 595,499 653,777 714,480 778,911
Salvage value 860,000
Plant and
equipment
(2,000,
000)
Net working
capital
(287,50
0) 287,500
Cash flow in
Bruneian
(2,287,
500) 688,544 740,511 795,499 853,777 914,480
2,126,41
1
Cash flow in
Canada
(1,989,
130) 603,562 654,350 707,896 765,111 825,288
1,936,44
3
IRR 31.50%
NPV
1,081,2
82
The above calculation has mainly indicated about the overall NPV of the project,
which is at the levels of CAD1,081,282. This value has been used by taking into account the
changes in currency values over the period of six years. Thus, it has helped in determining the
appropriate level of income that would be generated over the period of time after deducting
all the relevant expense and fixed costs (Andor, Mohanty and Toth 2015).
3. Determining the exchange risk exposure risk that company needs to consider before
investing in the project:
The other exchange risk exposure that Blooming Blueberries Inc. could face are
depicted as follows.
 Transaction exposure mainly arises from the overall exports and imports that the
organisation conducts over the period of time. In addition, the borrowing of funds and

4INTERNATIONAL CAPITAL BUDGETING CASE
investment is also associated with the exchange risk exposure that needs to be faced by
companies while conducting internal trades.
 Furthermore, the exchange rate is highly affected by the economic or cash flow exposures
that is conducted by companies for supporting the level of production and marketing
activities.
4. Identifying the other risk factors that needs to be considered by the company beside
exchange rate risk:
The major activities that is conducted within Brunei is by the Crown Prince Haji Al-
Muhtadee Billah and Princess Sarah. The presence of a monarchy mainly increases the risk of
unstable business operations, which might hinder the benefits that could be generated by
Blooming Blueberries Inc. from the investment. In addition, the monarchy has recently
announced to boost economic cooperation’s, which was previously not present for
international trades (Straitstimes.com 2019). Therefore, the unstable government can be
considered a major problem for Blooming Blueberries Inc, which could be acknowledged, as
the other risk factor without considering the exchange rate risk.
5. Mentioning about the decisions of Barry:
The statement of Barry is partially correct, as the difference in NPV will be conducted
by the rising level of interest payment, which could be conducted in Brunei. Hence, from the
analysis, it has been detected that the currency conversion or the benefit could be similar for
the organisation even after using the loan process from Brunei.
6. Stating whether the company should invest in the distribution centre in Brunei:
The company should not invest in the distribution centre in Brunei, as it would
reducing the overall benefit from the operations by 50%, which would not be fruitful for
Blooming Blueberries Inc.

5INTERNATIONAL CAPITAL BUDGETING CASE
References:
Andor, G., Mohanty, S.K. and Toth, T., 2015. Capital budgeting practices: A survey of
Central and Eastern European firms. Emerging Markets Review, 23, pp.148-172.
Straitstimes.com. 2019. Singapore, Brunei to boost economic cooperation. [online] The
Straits Times. Available at: https://www.straitstimes.com/politics/spore-brunei-to-boost-
economic-cooperation [Accessed 22 Jan. 2020].