Lecture 15 - Multinational capital budgeting. This chapter’s objectives are to: 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.
Lecture 15 Multinational Capital Budgeting 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 14 - Multinational Capital Budgeting Example: • Spartan, Inc is considering the development of a subsidiary in Singapore that will manufacture and sell tennis rackets locally 14 - Capital Budgeting Analysis: Spartan, Inc 14 - Capital Budgeting Analysis: Spartan, Inc 14 - Capital Budgeting Analysis Period t Demand (1) Price per unit (2) Total revenue (1) (2)=(3) Variable cost per unit (4) Total variable cost (1) (4)=(5) Annual lease expense (6) Other fixed annual expenses 14 - Capital Budgeting Analysis 13 14 15 16 17 18 19 Period t Net cash flow to subsidiary (12)+(8)=(13) Remittance to parent (14) Tax on remitted funds tax rate (14)=(15) Remittance after withheld tax (14)–(15)=(16) Salvage value (17) Exchange rate (18) Cash flow to parent 14 - 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 14 - Analysis Using Different Exchange Rate Scenarios: Spartan, Inc 14 - Sensitivity of the Project’s NPV to Different Exchange Rate Scenarios: Spartan, Inc 14 - 10 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 14 - 11 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 14 - 12 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 - 13 Capital Budgeting with Blocked Funds: Spartan, Inc Assume that all funds are blocked until the subsidiary is sold 14 - 14 • Source: Adopted from SouthWestern/Thomson Learning © 2006 14 - 15 ... 14 - Analysis Using Different Exchange Rate Scenarios: Spartan, Inc 14 - Sensitivity of the Project’s NPV to Different Exchange Rate Scenarios: Spartan, Inc 14 - 10 Factors to Consider in Multinational. .. annual expenses 14 - Capital Budgeting Analysis 13 14 15 16 17 18 19 Period t Net cash flow to subsidiary (12)+(8)=(13) Remittance to parent (14) Tax on remitted funds tax rate (14)= (15) Remittance... rate (14)= (15) Remittance after withheld tax (14)– (15) =(16) Salvage value (17) Exchange rate (18) Cash flow to parent 14 - Factors to Consider in Multinational Capital Budgeting Exchange rate