INTERNATIONAL FINANCE Multinational Capital Budgeting 1

Direct Investment MNC is parent Subsidiary is child May be joint venture with national company Need to calculate NPV and/or IRR 2

Input Data Initial investment Capital expenditure Working capital Setup costs 3

Input Data Price and consumer demand Compare with competitive products Inflation expectations for future prices Expected market share growth 4

Input Data Costs Variable costs Costs of components Expected inflation Demand forecast Fixed costs 5

Input Data Taxes Tax laws vary by country Money to stay in foreign country or repatriated to U.S.? 6

Input Data Exchange rates Hedge or not? How to forecast? Effects of forecasting errors Sensitivity analysis 7

Input Data Project length Political stability in country Attitude in foreign country towards MNC direct investment Risk of expropriation Plans to sell subsidiary 8

Input Data Required rate of return May be higher or lower than if done in U.S. Risk of project Political risk of country Benefit to diversification within company? 9

Capital Budgeting Example MNC wants to develop subsidiary in Singapore Manufacture and sell tennis rackets locally Project will end in four years 10

Capital Budgeting Example Initial investment 20 million Singapore dollars (S$) Includes working capital Spot XR is.50 $/S$ $10 million 11

Capital Budgeting Example Price and demand All currency figures are nominal 12 Year 1Year 2Year 3Year 4 Unit PriceS$350 S$360S$380 Demand60, ,000

Capital Budgeting Example Costs Variable costs Fixed costs Office lease: S$1 million/year Overhead: S$1 million/year 13 Year 1Year 2Year 3Year 4 VC/UnitS$200 S$250S$260

Capital Budgeting Example Taxes Singapore government 20% tax on income 10% tax on funds remitted to parent in U.S. U.S. government Tax credit for taxes paid in Singapore 14

Corporate Income Tax Rates 15

Capital Budgeting Example Project length Singapore government will pay parent S$12 million to purchase subsidiary after 4 years 16

Capital Budgeting Example Exchange rates Spot rate is.50 $/S$ Current spot rate is used as forecast of future spot rates Required rate of return Set at 15% based on low country risk for Singapore 17

Country Risk Ratings

Corruption Index Rating Source: Transparency International, 2009

Capital Budgeting Example

Sensitivity Analysis: XR

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