Lecture 15 - Multinational capital budgeting. This chapter’s objectives are to: To compare the capital budgeting analysis of an MNC’s subsidiary with that of its parent; to demonstrate how multinational capital budgeting can be applied to determine whether an international project should be implemented; and to explain how the risk of international projects can be assessed.
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15
Lecture
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Chapter Objectives
To compare the capital budgeting
analysis of an MNC’s subsidiary with that
of its parent;
To demonstrate how multinational capital
budgeting can be applied to determine
whether an international project should be
implemented; and
To explain how the risk of international
projects can be assessed.
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Multinational Capital Budgeting
Example:
• Spartan, Inc is considering the
development of a subsidiary in Singapore
that will manufacture and sell tennis
rackets locally.
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Capital Budgeting Analysis: Spartan, Inc.
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Capital Budgeting Analysis: Spartan, Inc.
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Capital Budgeting Analysis
Period t
(1)
(2)
(1) (2)=(3)
(4)
(1) (4)=(5)
(6)
(7)
(8)
9. Total expenses
(5)+(6)+(7)+(8)=(9)
(3)–(9)=(10)
tax rate (10)=(11)
(10)–(11)=(12)
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Capital Budgeting Analysis
Period t
(12)+(8)=(13)
(14)
tax rate (14)=(15)
(14)–(15)=(16)
(17)
(18)
(16) (18)+(17) (18)=(19)
(1+k)-t (19)=(20)
PVs–(21)=(22)
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Factors to Consider in Multinational Capital Budgeting
Exchange rate fluctuations
Since it is difficult to accurately forecast
exchange rates, different scenarios can be
considered together with their probability
of occurrence.
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Analysis Using Different Exchange Rate
Scenarios: Spartan, Inc.
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Sensitivity of the
Project’s NPV to
Different
Exchange Rate
Scenarios:
Spartan, Inc.
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Factors to Consider in Multinational Capital Budgeting
Inflation
Although price/cost forecasting implicitly
considers inflation, inflation can be quite
volatile from year to year for some
countries.
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Factors to Consider in Multinational Capital Budgeting
Financing arrangement
Financing costs are usually captured by
the discount rate.
However, when foreign projects are
partially financed by foreign subsidiaries,
a more accurate approach is to separate
the subsidiary investment and explicitly
consider foreign loan payments as cash
outflows.
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Factors to Consider in Multinational Capital Budgeting
Blocked funds
Some countries require that the earnings
generated by the subsidiary be reinvested
locally for at least a certain period of time
before they can be remitted to the parent.
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Capital Budgeting with Blocked Funds: Spartan, Inc.
Assume that all funds are blocked until the subsidiary is sold.
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