_International Capital Final)

8/9/2019 _International Capital Final)

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UNIT V

International Capital Budgeting

or

Evaluation of International Project


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Capital Budgeting A tool to evaluate long-term project

As it is a long-term and irrevocable decision,therefore, require extensive care

Cost of wrong decision is very high

Investment made beyond borders areINTERNATION PROJECTS.


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Capital Budgeting

or Project Appraisal

Answer the question: Whether or not to put themoney in the project

By comparing the CASH INFLOWS withCASH OUTFLOWS

Project Appraisal means assessing the

possibilities of generating a financial returnhigher than the cost of funds


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Capital Budgeting

Techniques

Non-Discounted Cash Flow Technique

Do not consider Time Value of Money (TMV)

1. Accounting Rate of Return

2. Pay-Back Period

Discounted Cash Flow Technique

Consider Time Value of Money (TMV)

1. Net Present Value Method (NPV)

2. Internal Rate of Return Method (IRR)


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Accounting Rate of Return (ARR)

100v!InvestmentInitial

rofitPAnnualAverage

ARR

100v!

InvestmentAverage

rofitPAnnualAverageARR


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Pay-Back Period Method

InflowCashnnual

Invest entInitialyearsinB !)(


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Net Present Value Method (NPV)

!

!n

tt

e

t

k

CCN V

1

0

)1(


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Internal Rate of Return (IRR)

!

!n

tt

e

t

k

CC

1

0

)1(


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Issues in International Projects

Initial investment in the host country may benefit

from a partial or total release of blocked funds.

Cash flows to be converted into the currency ofthe parent firm.

Cash flows generated from foreign projects may

replace revenue producing exports to the

host country.

Profits generated from projects undertaken in other

countries are subject to two taxing jurisdiction


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Issues in International Projects

Concessionary financing arrangements and

other benefits provided by the host country.

Foreign investment may produce diversificationbenefits to shareholders of the parent firm.

Terminal value is more difficult to estimate

than in the case or domestic projects.


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Although same methods as used for domesticproject evaluation like NPV or IRR can beused

But because of few added dimension inInternational projects, adjustments are to bemade. Thus method known as

Adjusted Present Value (APV) Method


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Adjusted Present Value (APV)

More complex in comparison to NPV, asadjustment for other added dimensions is there

Different Discounting Rate is used for differentcomponents, as per suitability

Different components for calculating APV are: Initial Investment

Remittable Cash Flows

Benefits from Concession Loans

Tax Savings and Other Transfer Benefits

Terminal Value


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Initial Investment

Where: S0 = Current Exchange Rate

C0 = Initial cash outlay in foreign currency terms

A0 = Activate fund (which was blocked earlier)

)(000

AS


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Remittable Cash Flows

Where: St = Expected Exchange Rate at time t

Ct = Expected Cash Inflow from above all items (sale, royalties, contractual

payments etc.) in foreign currency terms at time t

Et = Expected effect on cash inflows because of other items expressed in foreign

current at time t

T = Domestic or Foreign Tax Rates, whichever is higher

Ke = Discount rate applicable to project's cash flows from sale, royalties and others

!

sn

tt

e

ttt

k

TECS

1 )1(

)1()(


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Benefits from Concession Loan

Where: S0 = Current Exchange Rate

CL0 = Amount of concessional loan received in foreign currency

Rt = Repayment of concessional loan at time t

Kc = Discount rate for saving on concessionary loan (normal interest rate)

-

!

n

tt

c

t

kCLS

1

00

)1(


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Benefits from Transfer Pricing


Pt = Expected savings at time t from inter-subsidiary transfer pricing

It = Illegally repatriated cash flows at time t

Kh = Discount rate for saving from transfer pricing and illegal transfer (high rate)

!

n

tt

h

ttt

k

IPS

1 )1(

)(


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Terminal Value


Vt = Estimated Terminal Value

Ke = Normal Discount rate (similar which was used for cash inflows from sales)

t

e

tt

k

S

)1(


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Combined Formula

t

e

ttn

tt

h

tttn

tt

c

tn

tt

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k

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IPS

k

RS

k

SASAP

)1()1(

)(

)1()1(

)1()()(

11

00

1

000

-

s!

!!!

Documents

_International Capital Final)