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    Multinational Capital Budgeting

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    TúLinhNguyễn
    This document discusses key aspects of multinational capital budgeting. It outlines the objectives of assessing capital budgeting from the perspective of both the subsidiary and parent company. The parent's perspective is generally most appropriate when evaluating a project, though an exception may be made for non-wholly owned subsidiaries. Important inputs for multinational capital budgeting include forecasts of costs, demand, taxes, exchange rates and required rates of return. Factors like exchange rate fluctuations, inflation, financing arrangements and blocked funds also require consideration in multinational capital budgeting.

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    Multinational Capital Budgeting

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    TúLinhNguyễn
    56 views19 pages
    This document discusses key aspects of multinational capital budgeting. It outlines the objectives of assessing capital budgeting from the perspective of both the subsidiary and parent company. The parent's perspective is generally most appropriate when evaluating a project, though an exception may be made for non-wholly owned subsidiaries. Important inputs for multinational capital budgeting include forecasts of costs, demand, taxes, exchange rates and required rates of return. Factors like exchange rate fluctuations, inflation, financing arrangements and blocked funds also require consideration in multinational capital budgeting.

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    This document discusses key aspects of multinational capital budgeting. It outlines the objectives of assessing capital budgeting from the perspective of both the subsidiary and parent company. The parent's perspective is generally most appropriate when evaluating a project, though an exception may be made for non-wholly owned subsidiaries. Important inputs for multinational capital budgeting include forecasts of costs, demand, taxes, exchange rates and required rates of return. Factors like exchange rate fluctuations, inflation, financing arrangements and blocked funds also require consideration in multinational capital budgeting.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    56 views19 pages

    Multinational Capital Budgeting

    Uploaded by

    TúLinhNguyễn
    This document discusses key aspects of multinational capital budgeting. It outlines the objectives of assessing capital budgeting from the perspective of both the subsidiary and parent company. The parent's perspective is generally most appropriate when evaluating a project, though an exception may be made for non-wholly owned subsidiaries. Important inputs for multinational capital budgeting include forecasts of costs, demand, taxes, exchange rates and required rates of return. Factors like exchange rate fluctuations, inflation, financing arrangements and blocked funds also require consideration in multinational capital budgeting.

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    Lecture 10

    MULTINATIONAL CAPITAL BUDGETING

    Chapter Objectives

    Capital budgeting for an MNCs subsidiary


    with that of its parent;
    Multinational capital budgeting and intl
    project implementation;
    Assessment of the risk of international
    projects.

    Subsidiary versus Parent


    Perspective

    Should the capital budgeting for a multinational project be conducted from the
    viewpoint of the subsidiary that will
    administer the project, or the parent that will
    provide most of the financing?
    The results may vary with the perspective
    taken because the net after-tax cash inflows
    to the parent can differ substantially from
    those to the subsidiary.

    Subsidiary versus Parent


    Perspective
    The difference in cash inflows is due to :
    Tax differentials

    Regulations that restrict remittances


    Excessive remittances

    What is the tax rate on remitted funds?

    The parent may charge its subsidiary very high


    administrative fees.

    Exchange rate movements

    Remitting Subsidiary Earnings to the


    Parent
    Cash Flows Generated by Subsidiary

    Corporate Taxes
    Paid to Host
    Government

    After-Tax Cash Flows to Subsidiary


    Retained Earnings
    by Subsidiary
    Cash Flows Remitted by Subsidiary
    After-Tax Cash Flows Remitted by Subsidiary
    Conversion of Funds
    to Parents Currency
    Cash Flows to Parent
    Parent

    Withholding Tax
    Paid to Host
    Government

    Subsidiary versus Parent


    Perspective

    A parents perspective is appropriate when


    evaluating a project, since any project that
    can create a positive net present value for the
    parent should enhance the firms value.
    However, one exception to this rule may
    occur when the foreign subsidiary is not
    wholly owned by the parent.

    Input for Multinational


    Capital Budgeting
    The following forecasts are usually required:
    1.
    Initial investment
    2.
    Consumer demand
    3.
    Product price
    4.
    Variable cost
    5.
    Fixed cost
    6.
    Project lifetime
    7.
    Salvage (liquidation) value

    Input for Multinational


    Capital Budgeting
    The following forecasts are usually required:
    8.
    Fund-transfer restrictions
    9.
    Tax laws
    10.
    Exchange rates
    11.
    Required rate of return

    Multinational
    Capital Budgeting

    Capital budgeting is necessary for all longterm projects that deserve consideration.
    One common method of performing the
    analysis is to estimate the cash flows and
    salvage value to be received by the parent,
    and compute the net present value (NPV) of
    the project.

    Multinational
    Capital Budgeting

    NPV = initial outlay


    n

    cash flow in tperiod t

    t =1

    (1 + k )

    + salvage value
    (1 + k )n
    k = the required rate of return on the project
    n = project lifetime in terms of periods

    If NPV > 0, the project can be accepted.

    Factors to Consider in
    Multinational Capital

    Budgeting
    Exchange rate fluctuations. Different

    scenarios should be considered together with


    their probability of occurrence.
    Inflation. Although price/cost forecasting
    implicitly considers inflation, inflation can be
    quite volatile from year to year for some
    countries.

    Factors to Consider in
    Multinational Capital

    Budgeting
    Financing arrangement. Financing costs are

    usually captured by the discount rate.


    However, many foreign projects are partially
    financed by foreign subsidiaries.
    Blocked funds. Some countries may require
    that the earnings be reinvested locally for a
    certain period of time before they can be
    remitted to the parent.

    Factors to Consider in
    Multinational Capital

    Budgeting
    Uncertain salvage value. The salvage value

    typically has a significant impact on the


    projects NPV, and the MNC may want to
    compute the break-even salvage value.
    Impact of project on prevailing cash flows.
    The new investment may compete with the
    existing business for the same customers.
    Host government incentives. These should
    also be considered in the analysis.

    Adjusting Project
    Assessment

    for
    If anRisk
    MNC is unsure of the cash flows of a

    proposed project, it needs to adjust its


    assessment for this risk.
    One method is to use a risk-adjusted
    discount rate. The greater the uncertainty, the
    larger the discount rate that is applied.
    Many computer software packages are also
    available to perform sensitivity analysis and
    simulation.

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