Chapter 14, Problem 3QA

You are International Business Manager at a UK based company. Considering high demand your company plans a full-scale expansion. Your company has identified USA and Europe as potential markets. You are requested to analyse both projects and advise. In considering such large project, you must work out the risk of each project, cost of capital and NPV. Allocate discount rate for each project accordingly and justify why you allocated this rate in your discussion. Discuss how international risks can be managed.   Projected cash flows in respective currencies: Year    Net Cash Flow – USD USA    Net Cash Flow - EUR Europe0    -20 million    -20 million 1    2 million    2 million2    4 million    3 million3    5 million    4 million4    6 million    8 million5    8 million    8 million Instructions:a.    Discuss viability of both projects in today’s global business context and allocate discount rate. b.    How much investment is needed for each project and what is the NPV of each project? 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.

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