Lecture Multinational financial management: Lecture 15 - Dr. Umara Noreen

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