Chapter 17 Multinational Capital Budgeting

Objective of the chapter

Compare the capital budgeting analysis of an MNCs subsidiary vs. its parent Demonstrate how multinational capital budgeting can be applied to determine whether an international project should be implemented Explain how the risk of international projects can be assessed

Subsidiary V.S. Parent Perspective

Tax Differentials Restricted Remittances Excessive Remittances Exchange Rate Movements

Input for Multinational Capital Budgeting

Initial investment Consumer demand Price Variable cost Fixed cost Project lifetime Salvage(liquidation) value Fund-transfer restrictions Tax laws Exchange rates Required rate of return

Multinational Capital Budgeting Example

Spartan Inc, a US based manufacturer of tennis rackets Example: Analysis

Factors to consider in multinational capital budgeting

Exchange rate fluctuations Inflation Financing arrangement Blocked funds Uncertain salvage value Impact of project on prevailing cash flows Host government incentives

Adjusting project assessment for risk

Risk-adjusted discount rate Sensitivity analysis Simulation