Multinational Capital Budgeting n DEF: Selecting multinational assets & allocating the required...

Multinational Capital BudgetingMultinational Capital Budgeting

DEF: Selecting multinational assets & allocating the DEF: Selecting multinational assets & allocating the required funds with consideration of the following:required funds with consideration of the following:• Cheap loan from foreign governmentCheap loan from foreign government

• Foreign Exchange rate risk.Foreign Exchange rate risk.

• Multiple ties of taxation of different countriesMultiple ties of taxation of different countries

• Restrictions on repatriation of income.Restrictions on repatriation of income.

NPV=-CO+CFl (1+t)/(1+i)*t, where:NPV=-CO+CFl (1+t)/(1+i)*t, where:• NPV=Net Present ValueNPV=Net Present Value

• Co=cost of projectCo=cost of project

• E=Market value of equityE=Market value of equity

• CFl=Before tax expected cash flowCFl=Before tax expected cash flow

• t=tax ratet=tax rate

• I=WACC=interest rateI=WACC=interest rate

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Multinational Capital Budgeting Multinational Capital Budgeting cont..cont..

Factors Affecting Inventories Cash Flow: Factors Affecting Inventories Cash Flow: • Blocked Funds: Limitation of transfer of foreign exchange for trade or Blocked Funds: Limitation of transfer of foreign exchange for trade or

currency non-convertibility, if used for financing of the project, it alters currency non-convertibility, if used for financing of the project, it alters the cost of capital for the firm.the cost of capital for the firm.

• Remittance restriction: only remitted cash flow is relevant.Remittance restriction: only remitted cash flow is relevant.

• Differences in tax structure.Differences in tax structure.

• Concessionary loan.Concessionary loan.

• Effect on the sales of other divisionsEffect on the sales of other divisions

NPV=-CO+CFl (1+t)/(1+i)*t, where:NPV=-CO+CFl (1+t)/(1+i)*t, where:• NPV=Net Present ValueNPV=Net Present Value

• Co=cost of projectCo=cost of project

• E=Market value of equityE=Market value of equity

• CFl=Before tax expected cash flowCFl=Before tax expected cash flow

• t=tax ratet=tax rate

• I=WACC=interest rateI=WACC=interest rateMENU

Multinational Capital Budgeting Multinational Capital Budgeting cont..cont..

Calculation of Incremental Cash Flow: Calculation of Incremental Cash Flow: • Cash Flow associated with the projectCash Flow associated with the project

• Cost of CapitalCost of Capital

• Cash flow during the life of the project BCash flow during the life of the project B

Incremental Cash flow is different from total cash flow: Incremental Cash flow is different from total cash flow: • Cannibalization: new product taking sales away from existing productCannibalization: new product taking sales away from existing product

• Sales creation-opposite of cannibalizationSales creation-opposite of cannibalization

• Opportunity cost_windfall profit taxOpportunity cost_windfall profit tax

• Sunk costSunk cost

• Transfer pricingTransfer pricing

• National inflation difference, unexpected exchange rate, interest rate National inflation difference, unexpected exchange rate, interest rate difference, political & economical environment, anddifference, political & economical environment, and

• Difficulty in estimating terminal value.Difficulty in estimating terminal value.

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