International Project Appraisal

INTERNATIONAL PROJECT APPRAISAL

International project appraisal also known by a variety of names such as internal company analysis,
profiling the organization, capability or resource audit position and strategic advantage analysis, is the
process of evaluating a company’s posture relative to its business competition within and outside the
country, overall performance and its capability in terms of strengths and weaknesses.

Significance of International Project Appraisal

o The organization’s deficiency should also be compared with those of its successful competitors.
Such perceptive self appraisal when matched with environmental analysis facilities
management to grasp the opportunities and combat the threats inherent in the environment.
o International project appraisal has such a vital significance in international corporate planning.
Without such am-exercise it will not be possible to formulate economic strategy for an
organization on the objective basis.
o It helps the management in choosing the most suitable niche for the organization.
o Economic opportunities may bound in different parts of the globe.
o Position audit of the organization highlights its distinctive capabilities on which empire of
foreign business can be gainfully built. It also enables management to formulate
suitable competitive strategy.
o It focuses sharply on the areas where it is strong and can operate most effectively.With this
kind analysis the management can decide on the type of business, company should engage in a
country and what business abandon.
o It provides an insight into the weakness of the organization, through this way the management
can take steps to remove the weaknesses of the organization in the long run.

Factors to be considered in International Project Appraisal

The fundamental goal of the finance manager is to maximize shareholder’s wealth. This can be done if
the firm selects those projects that maximize the company’s value. The selection process involves a
detailed analysis of every project on every aspect. International projects involve more factors to be
analyzed as compared to the domestic projects.
1. Foreign Exchange Risk: Risk that the currency will appreciate or depreciate over a period of
time. It helps in understanding the cash flows generated by the project over its life cycle.

Projects: Planning, Control and Implementation

 International Project Appraisal

2. Remittance Restrictions: Many countries impose a variety of restriction on transfer of profits,

depreciation and other fees accruing to the parent company. Normally the project cash flows
include profits and depreciation but parent’s cash flows consist of the amount that can be
legally transformed. There are some techniques to curtail the restrictions like transfer pricing,
overhead payment, etc. To obtain a conservative estimate of the contribution by the project
the financial manager can include only the income which is remittable by law in the host
country.
3. Tax Issues: For a project evaluation only cash flows after tax are relevant. In international
projects, there exists two taxing jurisdiction. There exists differences in dividend management
fees, royalties, etc., to calculate the actual after tax cash flow, the higher tax rate are used. This
shows a conservative scenario that if the project is acceptable under this condition then it will
be necessarily acceptable under more favourable tax scenario.
4. Project versus Parent Cash Flows: Substantial differences can exist between the project and
parent cash flows because of tax regulations and exchange control. Also, expenses such as
management fees and royalties are returns to the parent company. The Project managers have
to decide whether the project Evaluation should be done on the basis of: – Its own cash flows?
– Cash flows accruing to the parent company? Or Both? This is one of the important factors to
be considered in an international project appraisal.
5. Financing Arrangements: The value of the project will be determined by the manner in
which it is financed. For example: many times, international agencies in order to promote
cross border trade finance at below market rates. In case of subsidized financing, determine
whether subsidized financing is separable or not from the project. When the subsidized
financing is inseparable then the value of loan should be added to that of the project in making
investment decision. But, if it is separable, then there is no need to allocate the value of loan in
the project.
6. Blocked Funds: Blocked funds are the cash flows generate by a foreign project that cannot be
immediately transferred to the parent, usually because of exchange controls imposed by the
govt. of the country in which the funds are held. 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 company. Blocked funds cause a discrepancy between the
project value from parent’s and local perspective. Also, this can possibly affect the accept/
reject decision for a project.

Projects: Planning, Control and Implementation

 International Project Appraisal

7. Inflation: The impact of inflation on the parent’s & subsidiary’s cash flow can be quite volatile
from year to year some countries. It may cause currency to weaken & hence influence a
project’s cash flow. Inaccurate inflation forecast by a country, can lead to inaccurate cash flow
forecast. Thus MNCs cannot afford to ignore the impact of inflation in the cash flow
8. Uncertain salvage value: The salvage value of a project has an important impact on the NPV
of the project. When the salvage value is uncertain, the cash flow will not be accurate & the
MNC may need to calculate various possible outcomes for the salvage value & estimate the
NPV based on each possible outcome. The feasibility of the project may then depend upon the
present value of the salvage value.
9. Adjustment for risk Cash flow v/s Discount rate adjustment: Another important dimension
in multinational capital budgeting is whether to adjust cash flow or the discount rate to
account for the additional risk arises from the foreign location of the project. Traditionally,
MNCs have adjusted the discount rate by moving it upwards for riskier projects to reflect the
political and foreign exchanged uncertainties.

Steps in International Project Appraisal

With the intention of developing the strategic advantage profile of an organization the management
should first collect information from external or
internal sources both from formal as well as Identifying strategic factors
informal channels and then interpret as well as
informal channels and then interpret them
incisively to determine its strengths and
weaknesses. The following steps involved in
Determining the importance of factors
international project appraisal.

1. Identifying strategic factors: The first step in

the process of corporate analysis is the
Determining strengths and weaknesses
identification of all those factors which are
crucial to the success of an international
organization. These factors may relate to
different aspects of the organization. These
Constructing strategic advantage
profile of a firm

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 International Project Appraisal

factors could conveniently be found in different functional areas such as marketing and finance
personal, research and development.
2. Determining the importance of factors: After identifying crucial factors for corporate appraisal
the management will have to determine the importance of each of these factors. Since all the factors
may not be of equal value to the organization for accomplishing its purpose it will be very necessary
to attach due importance to them.
3. Determining strengths and weaknesses: Once the relative significance of different factors has
been assessed the management should then attempt to determine the position of the organization
in each of these factors. Normally the strengths and weakness of a firm can be assessed by with the
firms own past results, comparing with accomplishment of competitors and also by comparing with
what they ought to be.
4. Constructing strategic advantage profile of a firm: After weighing the significance of each factor
for the company in its environment, the management compiles a strategic advantage profile for the
firm and compares it with profiles successful competitors of the potential of host countries to
develop a pattern of the firms strengths and weaknesses relative to its present and proposed
product market strategy.

Thus, experiencing international economies of scale, having greater competitive advantage, vertical
and horizontal diversification and attacking efficient foreign markets remain to be the top reasons for
project manager to go for international projects. Therefore, project Managers going in for
International Expansion must prudently use various established project evaluation and appraisal
techniques, taking into consideration the above factors and criteria for effective project
implementation and control .

Projects: Planning, Control and Implementation