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Chapter 14

Multinational Capital Budgeting

Lecture Outline

Subsidiary versus Parent Perspective Tax Differentials Restricted Remittances Excessive Remittances Exchange Rate Movements

Input for Multinational Capital Budgeting

Multinational Capital Budgeting Example Background Analysis

Factors to Consider in Multinational Capital Budgeting Exchange Rate Fluctuations Inflation Financing Arrangement Blocked Funds Uncertain Salvage Value Impact of Project on Prevailing Cash Flows Host ostHGovernment Incentives Real Options

Adjusting Project Assessment for Risk Risk-Adjusted Discount Rate Sensitivity Analysis Simulation

Chapter Theme

This chapter identifies additional
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ANSWER: Point estimates of exchange rates lead to a point estimate of a project’s NPV. It is more desirable to have a feel for a variety of outcomes (NPVs) that could occur.

The risk adjusted discount rate (RADR) is easy to use but generates only a single point estimate of the NPV. It may be more desirable to develop a distribution of possible NPVs in order to assess the probability that NPV will be positive. Sensitivity analysis and simulation could be very useful because they generate a distribution of NPVs.

To use simulation, develop a range of possible values that each input variable (such as price, quantity sold, exchange rates) may take on, and apply the simulation model to these ranges to generate a distribution of NPVs.

3. Uncertainty of Cash Flows. Using the capital budgeting framework discussed in this chapter, explain the sources of uncertainty surrounding a proposed project in Hungary by a U.S. firm. In what ways is the estimated net present value of this project more uncertain than that of a similar project in a more developed European country?

ANSWER: The estimated NPV is more uncertain because cash flows are more uncertain. The high degree of uncertainty surrounding the cash flows is attributed to uncertain economic conditions (especially given the shift to a market-oriented economy), and to an uncertain degree of competition (the competitive structure is changing substantially because of the removal of barriers).

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