Multinational Financial

Management

Alan Shapiro

7th Edition

Power Points by

J.Wiley & Sons

Joseph F. Greco, Ph.D.

California State University, Fullerton

1

CHAPTER 17

CAPITAL

BUDGETING FOR

THE

MULTINATIONAL

2

CHAPTER OVERVIEW:

I. BASIS OF CAPITAL BUDGETING

II. ISSUES IN FOREIGN INVESTMENT

ANALYSIS

III. POLITICAL RISK ANALYSIS

IV. GROWTH OPTIONS AND PROJECT

EVALUATION

3

I.BASICS OF CAPITAL

BUDGETING

I. BASICS OF CAPITAL BUDGETING

A. Basic Criterion: Net Present Value

B. Net Present Value Technique:

1. Definition

The present value of future cash flows,

discounted at the project’s cost of

capital less the initial net

cash outlay.

4

BASICS OF CAPITAL BUDGETING

2. NPV Formula:

n

Xt

NPV = − I 0 + ∑

t

(

1

+

k

)

t =1

where I0 = initial cash outlay

xt= net cash flow at t

k = cost of capital

n = investment horizon

5

BASICS OF CAPITAL BUDGETING

3.

4.

Most important property of NPV

technique:

-focus on cash flows with

respect to shareholder

wealth

NPV obeys value additive

principle:

- the NPV of a set of projects

is the sum of the individual

project NPV

6

BASICS OF CAPITAL BUDGETING

C. International Cash Flows

1. Important principle when

estimating: Incremental basis

2. Distinguish total from incremental

flows to account for

a. cannibalization

b. sales creation

c. opportunity cost

d. transfer pricing

e. fees and royalties

7

BASICS OF CAPITAL BUDGETING

3. Getting the base case correct

Rule of thumb:

Incremental

cash flows

Global

Global

= corporate flow

cash flow

without

with project

project

8

BASICS OF CAPITAL BUDGETING

4. Intangible Benefits

a. Valuable learning experience

b. Broader knowledge base

9

II. ISSUES IN FOREIGN

INVESTMENT ANALYSIS

II. TWO ISSUES IN FOREIGN INVESTMENT

ANALYSIS

A. Issue #1 Parent v. Project Cash Flow

-the cash flows from the project may

differ from those remitted to the parent

1. Relevant cash flows become quite

important

10

ISSUES IN FOREIGN INVESTMENT

ANALYSIS

2.

Three Stage Approach

-to simplify project evaluation

a. compute subsidiary’s project

cash flows

b. evaluate the project to the

parent

c. incorporate the indirect effects

11

ISSUES IN FOREIGN INVESTMENT

ANALYSIS

3. Estimating Incremental Project Flows

What is the true profitability of the

project?

a.

Adjust for tax effects of

1.) transfer pricing

2.) fees and royalties

12

ISSUES IN FOREIGN INVESTMENT

ANALYSIS

4.

Tax Factors:

determine the amount and timing

of taxes paid on foreign-source

income.

13

ISSUES IN FOREIGN INVESTMENT

ANALYSIS

B.

Issue #2 How to adjust for increased

economic and political risk of project? 1.

Three Methods of Economic

and

Political Risk Adjustments:

a. Shortening minimum payback

period

b. Raising required rate of return

c. Adjusting cash flows

14

ISSUES IN FOREIGN INVESTMENT

ANALYSIS

2. Accounting for Exchange Rate and

Price Changes (inflationary)

Two stage procedure:

a.

Convert nominal foreign cash

flows into home currency terms

b.

Discount home currency flows

at domestic required rate of return.

15

III. POLITICAL RISK ANALYSIS

I. POLITICAL RISK ANALYSIS

A. Political risks

can be incorporated into an NPV

analysis by

- adjusting expected project cash

flows to reflect the risks.

16

POLITICAL RISK ANALYSIS

B.

EXPROPRIATION

- the extreme form of political risk

C.

BLOCKED FUNDS

17

IV. GROWTH OPTIONS AND

PROJECT EVALUATION

IV.

GROWTH OPTIONS AND PROJECT

EVALUATION

A. Options:

1.

an important component of

many investment decisions

2.

ignoring options will understate

the NPV of that investment

18

GROWTH OPTIONS AND PROJECT

EVALUATION

B.

Project Evaluation

1.

Growth options require an

expanded NPV rule

2.

Investments in emerging markets

can be viewed as growth options

19

Management

Alan Shapiro

7th Edition

Power Points by

J.Wiley & Sons

Joseph F. Greco, Ph.D.

California State University, Fullerton

1

CHAPTER 17

CAPITAL

BUDGETING FOR

THE

MULTINATIONAL

2

CHAPTER OVERVIEW:

I. BASIS OF CAPITAL BUDGETING

II. ISSUES IN FOREIGN INVESTMENT

ANALYSIS

III. POLITICAL RISK ANALYSIS

IV. GROWTH OPTIONS AND PROJECT

EVALUATION

3

I.BASICS OF CAPITAL

BUDGETING

I. BASICS OF CAPITAL BUDGETING

A. Basic Criterion: Net Present Value

B. Net Present Value Technique:

1. Definition

The present value of future cash flows,

discounted at the project’s cost of

capital less the initial net

cash outlay.

4

BASICS OF CAPITAL BUDGETING

2. NPV Formula:

n

Xt

NPV = − I 0 + ∑

t

(

1

+

k

)

t =1

where I0 = initial cash outlay

xt= net cash flow at t

k = cost of capital

n = investment horizon

5

BASICS OF CAPITAL BUDGETING

3.

4.

Most important property of NPV

technique:

-focus on cash flows with

respect to shareholder

wealth

NPV obeys value additive

principle:

- the NPV of a set of projects

is the sum of the individual

project NPV

6

BASICS OF CAPITAL BUDGETING

C. International Cash Flows

1. Important principle when

estimating: Incremental basis

2. Distinguish total from incremental

flows to account for

a. cannibalization

b. sales creation

c. opportunity cost

d. transfer pricing

e. fees and royalties

7

BASICS OF CAPITAL BUDGETING

3. Getting the base case correct

Rule of thumb:

Incremental

cash flows

Global

Global

= corporate flow

cash flow

without

with project

project

8

BASICS OF CAPITAL BUDGETING

4. Intangible Benefits

a. Valuable learning experience

b. Broader knowledge base

9

II. ISSUES IN FOREIGN

INVESTMENT ANALYSIS

II. TWO ISSUES IN FOREIGN INVESTMENT

ANALYSIS

A. Issue #1 Parent v. Project Cash Flow

-the cash flows from the project may

differ from those remitted to the parent

1. Relevant cash flows become quite

important

10

ISSUES IN FOREIGN INVESTMENT

ANALYSIS

2.

Three Stage Approach

-to simplify project evaluation

a. compute subsidiary’s project

cash flows

b. evaluate the project to the

parent

c. incorporate the indirect effects

11

ISSUES IN FOREIGN INVESTMENT

ANALYSIS

3. Estimating Incremental Project Flows

What is the true profitability of the

project?

a.

Adjust for tax effects of

1.) transfer pricing

2.) fees and royalties

12

ISSUES IN FOREIGN INVESTMENT

ANALYSIS

4.

Tax Factors:

determine the amount and timing

of taxes paid on foreign-source

income.

13

ISSUES IN FOREIGN INVESTMENT

ANALYSIS

B.

Issue #2 How to adjust for increased

economic and political risk of project? 1.

Three Methods of Economic

and

Political Risk Adjustments:

a. Shortening minimum payback

period

b. Raising required rate of return

c. Adjusting cash flows

14

ISSUES IN FOREIGN INVESTMENT

ANALYSIS

2. Accounting for Exchange Rate and

Price Changes (inflationary)

Two stage procedure:

a.

Convert nominal foreign cash

flows into home currency terms

b.

Discount home currency flows

at domestic required rate of return.

15

III. POLITICAL RISK ANALYSIS

I. POLITICAL RISK ANALYSIS

A. Political risks

can be incorporated into an NPV

analysis by

- adjusting expected project cash

flows to reflect the risks.

16

POLITICAL RISK ANALYSIS

B.

EXPROPRIATION

- the extreme form of political risk

C.

BLOCKED FUNDS

17

IV. GROWTH OPTIONS AND

PROJECT EVALUATION

IV.

GROWTH OPTIONS AND PROJECT

EVALUATION

A. Options:

1.

an important component of

many investment decisions

2.

ignoring options will understate

the NPV of that investment

18

GROWTH OPTIONS AND PROJECT

EVALUATION

B.

Project Evaluation

1.

Growth options require an

expanded NPV rule

2.

Investments in emerging markets

can be viewed as growth options

19

## FM11 Ch 26 Multinational Financial Management

## Lecture multinational financial management chapter 1 ngo thi ngoc huyen

## Lecture multinational financial management chapter 2 ngo thi ngoc huyen

## Lecture multinational financial management chapter 3 ngo thi ngoc huyen

## Lecture multinational financial management chapter 4 ngo thi ngoc huyen

## Lecture multinational financial management chapter 5 ngo thi ngoc huyen

## Lecture multinational financial management chapter 6 ngo thi ngoc huyen

## Lecture multinational financial management chapter 7 ngo thi ngoc huyen

## BT thanh toan quoc te multinational financial management dap an

## Test bank Finance Management chapter 19 multinational financial management

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