Podcast
Questions and Answers
What is the primary focus of multinational capital budgeting?
What is the primary focus of multinational capital budgeting?
Which step is NOT part of capital budgeting for a foreign project?
Which step is NOT part of capital budgeting for a foreign project?
What capital budgeting criterion considerations are typically used in multinational project evaluation?
What capital budgeting criterion considerations are typically used in multinational project evaluation?
What must be justified through traditional financial analysis in multinational capital budgeting?
What must be justified through traditional financial analysis in multinational capital budgeting?
Signup and view all the answers
Which of the following is TRUE regarding the theoretical framework used in multinational capital budgeting?
Which of the following is TRUE regarding the theoretical framework used in multinational capital budgeting?
Signup and view all the answers
What must be true for a project to be accepted according to the NPV rule?
What must be true for a project to be accepted according to the NPV rule?
Signup and view all the answers
From which perspective is it generally more appropriate to evaluate a project?
From which perspective is it generally more appropriate to evaluate a project?
Signup and view all the answers
When evaluating a project, what is one key aspect that should be subordinated?
When evaluating a project, what is one key aspect that should be subordinated?
Signup and view all the answers
Which of the following is NOT included in the calculation of NPV?
Which of the following is NOT included in the calculation of NPV?
Signup and view all the answers
What does the required rate of return on a project represent in the NPV formula?
What does the required rate of return on a project represent in the NPV formula?
Signup and view all the answers
What is a significant factor in the complexity of capital budgeting for foreign projects compared to domestic projects?
What is a significant factor in the complexity of capital budgeting for foreign projects compared to domestic projects?
Signup and view all the answers
What can cause differences in net after-tax cash inflows between a parent company and its subsidiary?
What can cause differences in net after-tax cash inflows between a parent company and its subsidiary?
Signup and view all the answers
Why is estimating terminal value more challenging for multinational projects?
Why is estimating terminal value more challenging for multinational projects?
Signup and view all the answers
Which factor must managers evaluate to influence the discount rate for capital budgeting in foreign projects?
Which factor must managers evaluate to influence the discount rate for capital budgeting in foreign projects?
Signup and view all the answers
What is a potential drawback of excessive remittances between a parent and its subsidiary?
What is a potential drawback of excessive remittances between a parent and its subsidiary?
Signup and view all the answers
Study Notes
Multinational Capital Budgeting
- Multinational capital budgeting involves evaluating investments in foreign subsidiaries.
- The process of capital budgeting for a foreign project uses the same theoretical framework as domestic capital budgeting.
- Key decisions in international projects are often strategic, behavioral, and economic, besides reinvestment decisions.
- These decisions need to be justified by traditional financial analysis.
- Multinational capital budgeting, like domestic capital budgeting, concentrates on cash inflows and outflows from long-term investment projects.
- Capital budgeting is needed for all worthy long-term projects.
Outline of Multinational Capital Budgeting
- Explain multinational capital budgeting.
- Compare capital budgeting analysis of an MNC's subsidiary and its parent.
- Show how multinational capital budgeting helps determine if an international project is viable.
- Explain how to assess the risks of international projects.
Steps in Multinational Capital Budgeting
- Identify the initial capital invested or at risk.
- Estimate project cash flows over time, including terminal/salvage value.
- Determine the appropriate discount rate.
- Use traditional criteria like NPV, IRR, and payback period.
Multinational Capital Budgeting (3)
- Foreign project analysis is more intricate than domestic.
- Distinguish parent/subsidiary cash flows from project cash flows.
- Parent/subsidiary cash flows depend on the financing structure.
- Cash flows generated by an investment in one subsidiary can sometimes affect another.
- Exchange rates, taxes, and remittances significantly affect cash flow projections.
Subsidiary vs. Parent Perspective
- Should multinational project budgeting be from the subsidiary or parent's perspective?
- Perspective affects calculations because net after-tax cash flow to the parent can differ substantially from that of the subsidiary.
- This is due to factors like tax differences, remittance restrictions, high administrative fees, and exchange rate fluctuations.
Subsidiary vs. Parent Perspective (2)
- Differences in project valuations are due to:
- Tax differentials.
- Regulations restricting remittances and the tax rate on remitted funds.
- Excessive remittances demanding high administrative fees.
- Exchange rate fluctuations impact cash flows.
Subsidiary vs. Parent Perspective (3)
- Managers should evaluate country risk influencing discount rates, impacting expected cash flows.
- Political, macroeconomic, and other events can drastically reduce cash flow value or availability.
- Country risk premiums affect discount rates.
- Terminal values are difficult to estimate when considering various potential purchases from multiple parties (host, parent, etc.).
- Different perspectives on project value can exist.
Remitting Subsidiary Earnings to the Parent
- Cash flows are generated in the subsidiary.
- After-tax cash flows go to the subsidiary.
- Cash is remitted by the subsidiary.
- After-tax cash flows from remittances are converted to the parent's currency.
Project vs. Parent Valuation
- Analyzing a foreign project from a parent's viewpoint is justified; parent's projects positively impact firm value.
- Exceptions exist when the subsidiary isn't wholly owned by the parent.
- A local project should provide at least the risk-free return obtained from host government bonds with the same maturity as the project's economic life.
###Project vs. Parent Valuation (2)
- Many firms evaluate foreign projects from both parent and subsidiary viewpoints to understand the project's NPV impact on the company's overall earnings.
- Two methods to view the issue exist: centralized and decentralized capital budgeting.
###Project vs. Parent Valuation (3)
- Methods focus on nominal cash flows, exchange rates, and expected costs of capital for local and parent currencies.
- Methods start by estimating the project's local currency cash flows.
- Long-term projections consider competitive and market advantages.
- Estimated cash flows must exclude tax payments.
Decentralized Capital Budgeting
- Forecast cash flows in the local currency.
- Discount those cash flows using the foreign cost of capital.
- Convert the NPV to the parent's home currency using the spot exchange rate.
Centralized Capital Budgeting
- Forecast cash flows in the local currency.
- Convert these cash flows into the parent's home currency using expected annual exchange rates.
- Discount using the domestic cost of capital to account for the parent's currency.
Centralized vs. Decentralized
- Firms typically evaluate foreign investments from both parent and subsidiary viewpoints and consider the combined impact on consolidated earnings.
- The final decision rests with the parent company, whether centralized or decentralized.
- Decentralized firms may delegate decision-making at subsidiary/regional HQ levels to the parent company.
Multinational Capital Budgeting & MNC's Value
- Value of a multinational company considers expected cash flows from parent and expected exchange rates.
- Value is the sum of the present values of all projected cash flows considered in the relevant currency and considering the exchange rate.
- The discount rate used is the weighted average cost of capital for the MNC.
Adjusting Project Assessment for Risk
- If an MNC is uncertain about project cash flows, a risk-adjusted discount rate might be used.
- The higher the uncertainty, the higher the discount rate applied.
- Using sensitivity or simulation methods to adjust for risk factors is also common.
Input for Multinational Capital Budgeting
- Initial Investment
- Consumer Demand
- Product Price
- Variable Cost
- Fixed Cost
- Project Lifetime
- Salvage Value
- Fund Transfer Restrictions
Capital budgeting analysis (Parent) - Example periods
- Detailed calculations for periods to determine demand, price per unit, total revenue, variable cost, annual lease expense, fixed expenses, noncash expenses, and before-tax earnings among other things.
Capital budgeting analysis - Example period
- Detailed calculations for periods to determine total cost, net cash flow, tax on remitted funds, remittance after amounts withheld, salvage value and cash flow to parent among other things.
Studying That Suits You
Use AI to generate personalized quizzes and flashcards to suit your learning preferences.
Related Documents
Description
Test your knowledge on multinational capital budgeting concepts, including evaluating investments in foreign subsidiaries and comparing capital budgeting analysis between a multinational corporation's subsidiaries and its parent company. Learn about the risks and viability assessment of international projects through this quiz.