Capital Budgeting for the Multinational Corporation

5480 WordsMar 21, 201122 Pages
CHAPTER 17 CAPITAL BUDGETING FOR THE MULTINATIONAL CORPORATION This chapter focuses on three aspects of foreign investment analysis that are infrequently considered in evaluating domestic projects: the difference between project and parent cash flows; incorporating political risks such as expropriation and currency controls; and factoring in inflation and exchange rate changes in cash flow estimates. It also evaluates the various methods used to incorporate in the investment analysis the additional risks encountered overseas. These points are brought out in the process of working through the International Diesel Corporation Case. The ability to perform a capital budgeting analysis is one of the most valuable skills we can provide our…show more content…
would have earned on these lost exports. 5. Why are loan repayments by IDC-U.K. to Lloyds and NEB treated as a cash inflow to the parent company? Answer. Loan repayments by IDC-U.K. to Lloyds and NEB are treated as cash inflows to the parent because they reduce its outstanding consolidated debt burden and increase the value of its equity by an equivalent amount. Assuming that the parent would repay these loans regardless, then having IDC-U.K. borrow and repay funds is equivalent to IDC-U.S. borrowing the money, investing it in IDC- U.K., and then using IDC-U.K.'s higher cash flows (since it no longer has British loans to service) to repay IDC-U.S.'s debts. 6. How sensitive is the value of the project to the threat of currency controls and expropriation? How can the financing be structured to make the project less sensitive to these political risks? Answer. Figures in Exhibit 17.6 reveal that the value of IDC's English project is quite sensitive to the potential political risks of currency controls and expropriation. The project NPV does not turn positive until well after its fifth year of operation (assuming there are no lost sales). Should expropriation occur or exchange controls be imposed at some point during the first five years, the project is unlikely to ever be economically viable. In the face of these risks, the project is viable only if compensation
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