1. Multinational Capital Budgeting n DEF: Selecting multinational assets & allocating the required funds with consideration of the following: Cheap loan from foreign governmentCheap loan from foreign government Foreign Exchange rate risk.Foreign Exchange rate risk. Multiple ties of taxation of different countriesMultiple ties of taxation of different countries Restrictions on repatriation of income.Restrictions on repatriation of income. n NPV=-CO+CFl (1+t)/(1+i)*t, where: NPV=Net Present ValueNPV=Net Present Value Co=cost of projectCo=cost of project E=Market value of equityE=Market value of equity CFl=Before tax expected cash flowCFl=Before tax expected cash flow t=tax ratet=tax rate I=WACC=interest rateI=WACC=interest rate MENU

2. Multinational Capital Budgeting cont.. n Factors Affecting Inventories Cash Flow: Blocked Funds: Limitation of transfer of foreign exchange for trade or currency non-convertibility, if used for financing of the project, it alters the cost of capital for the firm.Blocked Funds: Limitation of transfer of foreign exchange for trade or currency non-convertibility, if used for financing of the project, it alters the cost of capital for the firm. Remittance restriction: only remitted cash flow is relevant.Remittance restriction: only remitted cash flow is relevant. Differences in tax structure.Differences in tax structure. Concessionary loan.Concessionary loan. Effect on the sales of other divisionsEffect on the sales of other divisions n NPV=-CO+CFl (1+t)/(1+i)*t, where: NPV=Net Present ValueNPV=Net Present Value Co=cost of projectCo=cost of project E=Market value of equityE=Market value of equity CFl=Before tax expected cash flowCFl=Before tax expected cash flow t=tax ratet=tax rate I=WACC=interest rateI=WACC=interest rate MENU

3. Multinational Capital Budgeting cont.. n Calculation of Incremental Cash Flow: Cash Flow associated with the projectCash Flow associated with the project Cost of CapitalCost of Capital Cash flow during the life of the project BCash flow during the life of the project B n Incremental Cash flow is different from total cash flow: Cannibalization: new product taking sales away from existing productCannibalization: new product taking sales away from existing product Sales creation-opposite of cannibalizationSales creation-opposite of cannibalization Opportunity cost_windfall profit taxOpportunity cost_windfall profit tax Sunk costSunk cost Transfer pricingTransfer pricing National inflation difference, unexpected exchange rate, interest rate difference, political & economical environment, andNational inflation difference, unexpected exchange rate, interest rate difference, political & economical environment, and Difficulty in estimating terminal value.Difficulty in estimating terminal value. MENU

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