Chapter
Chapter Objectives
To compare the capital budgeting analysis
of an MNCs subsidiary with that of its parent;
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Tax differentials
Corporate Taxes
Paid to Host
Government
Withholding Tax
Paid to Host
Government
Conversion of Funds
to Parents Currency
Cash Flows to Parent
Parent
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Multinational
Capital Budgeting
Capital budgeting is necessary for all
long-term projects that deserve
consideration.
Multinational
Capital Budgeting
NPV = initial outlay
n
t
cash flow in period
t
t =1
(1 + k )
+ salvage value
(1 + k )n
k = the required rate of return on the project
n = project lifetime in terms of periods
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13.
14.
15.
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)=(19)
20.
PV of Parents Cash Flow (%)(20)
21. Initial Investment (-)
(21)
23.
Cumulative NPV(23)
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Factors to Consider in
Multinational Capital Budgeting
Exchange rate fluctuations. Different
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Factors to Consider in
Multinational Capital Budgeting
Financing arrangement. Financing costs
Factors to Consider in
Multinational Capital Budgeting
Uncertain salvage value. The salvage value
E CF E ER
Value =
t =1
j 1
j, t
1 k
j, t
E (CFj,t )
=
expected cash flows in
currency j to be received by the U.S. parent at the
end of period t
E (ERj,t )
=
expected exchange rate at
which currency j can be converted to dollars at
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Chapter Review
Subsidiary versus Parent Perspective
Tax Differentials
Restricted Remittances
Excessive Remittances
Exchange Rate Movements
Chapter Review
Factors to Consider in Multinational Capital
Budgeting
Exchange Rate Fluctuations
Inflation
Financing Arrangement
Blocked Funds
Uncertain Salvage Value
Impact of Project on Prevailing Cash Flows
Host Government Incentives
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Chapter Review
Adjusting Project Assessment for Risk
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