C H A P T E R 14C H A P T E R 14

Multinational Capital Multinational Capital BudgetingBudgeting

Chapter OverviewChapter Overview

A. Subsidiary versus Parent PerspectiveA. Subsidiary versus Parent Perspective

B. Input for the Multinational CapitalB. Input for the Multinational CapitalBudgetingBudgeting

C. Factors to Consider in Multinational C. Factors to Consider in Multinational Capital BudgetingCapital Budgeting

D. Adjusting Project Assessment for RiskD. Adjusting Project Assessment for Risk

Chapter 14 ObjectivesChapter 14 Objectives

This chapter will:This chapter will:

A. Compare the capital budgeting analysis of A. Compare the capital budgeting analysis of an MNC’s subsidiary versus its parentan MNC’s subsidiary versus its parent

B. Demonstrate how multinational capital B. Demonstrate how multinational capital building can be applied to determine building can be applied to determine whether an international project should whether an international project should be implementedbe implemented

C. Explain how the risk of international C. Explain how the risk of international projects can be assessed.projects can be assessed.

A. Subsidiary versus Parent A. Subsidiary versus Parent Perspective Perspective

1. Tax Differentials1. Tax Differentials

2. Restricted Remittances2. Restricted Remittances

3. Excessive Remittances3. Excessive Remittances

4. Exchange Rate Movements4. Exchange Rate Movements

5. Summary of Factors5. Summary of Factors

14.114.1

Process of Remitting Subsidiary Earnings to Parent

B. Input for the Multinational B. Input for the Multinational Capital BudgetingCapital Budgeting

1. Economic and Financial Characteristics 1. Economic and Financial Characteristics InvolvedInvolved

a. Initial Investmenta. Initial Investmentb. Price and Consumer Demandb. Price and Consumer Demandc. Costsc. Costsd. Tax Lawsd. Tax Lawse. Remitted Fundse. Remitted Fundsf. Exchange Ratesf. Exchange Ratesg. Salvage Valueg. Salvage Valueh. Required Rate of Returnh. Required Rate of Return

C. Factors to Consider in C. Factors to Consider in Multinational Capital BudgetingMultinational Capital Budgeting

1. Exchange Rate Fluctuations1. Exchange Rate Fluctuations

2. Inflation2. Inflation

14.414.4Sensitivity of the Project’s NPV to Different ExchangeRate Scenarios:Spartan, Inc.

C. Factors to Consider in C. Factors to Consider in Multinational Capital BudgetingMultinational Capital Budgeting

3. Financing Arrangement3. Financing Arrangement

a. Subsidiary Financinga. Subsidiary Financing

b. Parent Financingb. Parent Financing

c. Comparison of Parent versus c. Comparison of Parent versus Subsidiary Financing Subsidiary Financing

d. Financing with Other d. Financing with Other Subsidiaries’ Retained Earnings Subsidiaries’ Retained Earnings

C. Factors to Consider in C. Factors to Consider in Multinational Capital BudgetingMultinational Capital Budgeting

4. Blocked Funds4. Blocked Funds

5. Uncertain Salvage Value5. Uncertain Salvage Value

6. Impact of Project on Prevailing Cash 6. Impact of Project on Prevailing Cash FlowsFlows

7. Host Government Incentives7. Host Government Incentives

8. Real Options8. Real Options

D. Adjusting Project Assessment D. Adjusting Project Assessment for Riskfor Risk

1. Risk-Adjusted Discount Rate1. Risk-Adjusted Discount Rate

2. Sensitivity Analysis2. Sensitivity Analysis

3. Simulation3. Simulation