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International Business Book

International Business Book

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Published by Waqas Abrar

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Published by: Waqas Abrar on Jan 11, 2012
Copyright:Attribution Non-commercial

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06/28/2013

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Capital budgeting quantifies the benefits, costs, and risks
of an investment. This enables top managers to compare,
in a reasonably objective fashion, different investment
alternatives within and across countries so they can make
informed choices about where the firm should invest its
scarce financial resources. Capital budgeting for a
foreign project uses the same theoretical framework that
domestic capital budgeting uses. Once the cash flows
have been estimated, they must be discounted to
determine their net present value using an appropriate
discount rate. The most commonly used discount rate is
either the firm's cost of capital or some other required
rate of return.

Among the factors complicating the process for an
international business are these:

1.A distinction must be made between cash flows to
the project and cash flows to the parent company.
2.Political and economic risks, including foreign
exchange risk, can significantly change the value of
a foreign investment.
3.The connection between cash flows to the parent
and the source of financing must be recognized.

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