1. Multinational Capital Budgeting 15 Lecture

2. 14 - 2 Chapter Objectives To compare the capital budgeting analysis of an MNC’s subsidiary with that of its parent; To demonstrate how multinational capital budgeting can be applied to determine whether an international project should be implemented; and To explain how the risk of international projects can be assessed.

3. 14 - 3 Multinational Capital Budgeting Example: Spartan, Inc. is considering the development of a subsidiary in Singapore that will manufacture and sell tennis rackets locally.

4. 14 - 4 Capital Budgeting Analysis: Spartan, Inc.

5. 14 - 5 Capital Budgeting Analysis: Spartan, Inc.

6. 14 - 6 Capital Budgeting Analysis Period t 1.Demand(1) 2.Price per unit(2) 3.Total revenue(1)  (2)=(3) 4.Variable cost per unit(4) 5.Total variable cost (1)  (4)=(5) 6.Annual lease expense(6) 7.Other fixed annual expenses(7) 8.Noncash expense (depreciation)(8) 9.Total expenses(5)+(6)+(7)+(8)=(9) 10.Before-tax earnings of subsidiary(3)–(9)=(10) 11.Host government taxtax rate  (10)=(11) 12.After-tax earnings of subsidiary(10)–(11)=(12)

7. 14 - 7 Capital Budgeting Analysis Period t 13.Net cash flow to subsidiary (12)+(8)=(13) 14.Remittance to parent(14) 15.Tax on remitted fundstax rate  (14)=(15) 16.Remittance after withheld tax(14)–(15)=(16) 17.Salvage value(17) 18.Exchange rate(18) 19.Cash flow to parent(16)  (18)+(17)  (18)=(19) 20.PV of net cash flow to parent(1+k) - t  (19)=(20) 21.Initial investment by parent(21) 22.Cumulative NPV  PVs–(21)=(22)

8. 14 - 8 Factors to Consider in Multinational Capital Budgeting  Exchange rate fluctuations Since it is difficult to accurately forecast exchange rates, different scenarios can be considered together with their probability of occurrence.

9. 14 - 9 Analysis Using Different Exchange Rate Scenarios: Spartan, Inc.

10. 14 - 10 Sensitivity of the Project’s NPV to Different Exchange Rate Scenarios: Spartan, Inc.

11. 14 - 11 Factors to Consider in Multinational Capital Budgeting  Inflation Although price/cost forecasting implicitly considers inflation, inflation can be quite volatile from year to year for some countries.

12. 14 - 12 Factors to Consider in Multinational Capital Budgeting  Financing arrangement Financing costs are usually captured by the discount rate. However, when foreign projects are partially financed by foreign subsidiaries, a more accurate approach is to separate the subsidiary investment and explicitly consider foreign loan payments as cash outflows.

13. 14 - 13 Factors to Consider in Multinational Capital Budgeting  Blocked funds Some countries require that the earnings generated by the subsidiary be reinvested locally for at least a certain period of time before they can be remitted to the parent.

14. 14 - 14 Capital Budgeting with Blocked Funds: Spartan, Inc. Assume that all funds are blocked until the subsidiary is sold.

15. 14 - 15 Source: Adopted from South- Western/Thomson Learning © 2006