Answered: Capital budgeting for a foreign project…

Capital budgeting for a foreign project is considerably more complex than the domestic case. Discuss FIVE major factors contribute to this greater complexities.

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter14: Multinational Capital Budgeting

Section: Chapter Questions

Problem 6ST

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Production Budget

A budget can be defined as a financial plan designed by an undertaking for a definite period in the future that can contribute towards enhancing the financial success of the business undertaking. It is used to estimate the revenue and expenses. The budget generally takes into account both current and future income and expenses.

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Explain the differences of two: Domestic Capital Budgeting and Multinational Capital Budgeting
Discuss the important factors one should consider in the international capital budgeting process to be undertaken by a multinational firm.
Explain how political risk and exchange rate risk increase the uncertainty of international projects for the purpose of capital budgeting.
Discuss factors that must be considered for capital budgeting for an MNC’s foreign subsidiary that might not be considered for domestic investment
Which of the statements below is FALSE? A. Multinational capital budgeting is a straightforward application of the Net Present Value (NPV. model with one twist: we can do the analysis in either domestic currency or foreign currency. B. If we are using foreign currency for the NPV decision, all we have to do is restate all the foreign incremental cash flow in terms of future value and use the current exchange rate. C. In conducting a multinational NPV, one must be careful to avoid differences with rounding of exchange rates, discount rates, and cash flow to produce the exact same value. D. With the foreign currency approach in NPV analysis, if we know the appropriate discount rate in the home country and the expected inflation rates in the two countries, we can determine the appropriate foreign discount rate.
Which of the following investment criteria are commonly used by Canadian firms in their capital budgeting decisions? Select one: a. net present value b. internal rate of return c. payback period d. a and b only e. a, b, and c
Question Which of the statements below is FALSE? A. Multinational capital budgeting is a straightforward application of the Net Present Value (NPV. model with one twist: we can do the analysis in either domestic currency or foreign currency. B. If we are using foreign currency for the NPV decision, all we have to do is restate all the foreign incremental cash flow in terms of future value and use the current exchange rate. C. In conducting a multinational NPV, one must be careful to avoid differences with rounding of exchange rates, discount rates, and cash flow to produce the exact same value. D. With the foreign currency approach in NPV analysis, if we know the appropriate discount rate in the home country and the expected inflation rates in the two countries, we can determine the appropriate foreign discount rate.
One of the important components of multinational capital budgeting is to analyze the cash flows generated from subsidiary companies. Consider this case: Sacramone Products Co. is a U.S. firm evaluating a project in Australia. You have the following information about the project: • The project requires an investment of AU$1,230,000 today and is expected to generate cash flows of AU$1,200,000 at the end of each of the next two years. • The current exchange rate of the U.S. dollar against the Australian dollar is $0.7877 per Australian dollar (AU$). • The one-year forward exchange rate is $0.8109 / AU$, and the two-year forward exchange rate is $0.8455 / AU$. • The firm’s weighted average cost of capital (WACC) is 9%, and the project is of average risk. What is the dollar-denominated net present value (NPV) of this project? $933,397 $777,831 $738,939 $855,614
Capital budgeting can be affected by factors such as exchange rate risk, political risk, transfer pricing, and strategic risk. Select a mid- or large-sized business organization and explain how each of these factors can affect its capital budgeting. Which factor poses the greatest threat to your selected organization and why? What measures can stakeholders take to reduce adverse impacts of these factors?
Why should capital budgeting for subsidiary projects be assessed from the parent’s perspective? What additional factors that normally are not relevant for a purely domestic project deserve consideration in multinational capital budgeting?
What do managers use to evaluate domestic and international capital investment projects? A) capital budgeting B) multilateral netting C) net present value D) transfer pricing E) parent's perspective
Apple is considering a large capital investment in Brazil. The project cash flows have been prepared in Reals, however, Apple plans to fund the entire investment out of its US Dollar ($) holdings. Describe the qualitative and quantitative capital budgeting procedures that Apple should use to evaluate the investment.