International Project

Appraisal
Special Problems in International Project
Appraisal
Multinational corporations (MNC) frequently invest in foreign countries through
their subsidiaries established in those foreign countries (also called ‘host countries’).
These subsidiaries may be viewed as the MNCs' ‘investment arms’, or ‘business arms’,
in host countries.
Multinational corporations' foreign investment analysis is complicated by a variety of
factors and risks that are not encountered by purely domestic firms or purely national
investments. These complicating factors and risks stem from:
involvement of more than one company – the existence of parent and subsidiary
involvement of more than one country – home (or parent's) country and host (or foreign
or subsidiary's) country
tax differentials between home and host countries
requirement to convert funds from one currency to another currency and the associated
risks due to unpredictable exchange rate movements
country risk: the host country's political, social, economic and financial risk factors.
The basic concepts, principles and techniques of project analysis still apply to
multinational corporations' foreign investments.
 International Capital Budgeting

The Capital Budgeting Decision Process

 The Relevant Cash Flows
 Initial
 Operating
 Terminal
 Exchange and Political Risk Factors
 Capital Budgeting Techniques
 Payback
 NPV
 IRR
 Approaches for Dealing with Risk
A Decision Criterion for the Long Run
PV is the "present value" of an expected future
income stream, V is a predicted future net income
(or return) in each of n future periods.
The decision criterion: The rate of return, r, is
at least as great as the best market interest rate,
i, or r ≥ i.
Payback: If r is the internal rate of return and K is
the capital outlay required to implement the
investment opportunity.
Example: investment decision criterion: r ≥i
where i =8%
Table1. Hypothetical investment opportunities and rates
of return

Figure1. The marginal efficiency of capital.

Investment opportunities A, B, and C ought to be undertaken;

opportunities D and E ought to be rejected because their rates
of return would not be sufficient to pay the interest on
borrowing to finance them.
MNCs have more complexities comparing to
domestic capital projects

2 steps to evaluate an oversees

subsidiary project return:
1. The project cash flow evaluated at local currency
using NPV
2. Cash flow accruing to parent company using NPV:
the present value of remittable cash flow
International Project appraisal
Given exchange control, remittable parent cash flows
may be achieved by:
Dividend repatriation; royalties and management fees;
loan repayment; countertrades; other means of
unblocking, e.g., swaps, currency invoicing, parallel
loans, etc.
Finding the Operating Cash Inflows
The income statement format for calculating operating
cash inflows is:
Revenue
- Expenses (Excluding Depreciation)
= Profits Before Depreciation and Taxes
- Depreciation
= Net Profits Before Taxes
- Taxes
= Net Profits After Taxes
+ Depreciation
= Operating Cash Inflows
Interpreting
n
the Cash Flows: NPV
NPV =  CFt
i=1 (1 + k)t - II

= Present Value of Cash Inflows - Initial Investment