ChapterMultinationalCapitalBudgeting

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1、Chapter 14 Multinational Capital BudgetingMultinational Capital Budgeting14 ChapterSouth-Western/Thomson Learning ? 2003See c14.xls for spreadsheets to accompany this chapter.Chapter ObjectivesTo compare the capital budgeting analysis of an MNCs subsidiary with that of its parent;To demonstrate how

2、multinational capital budgeting can be applied to determine whether an international project should be implemented; andTo explain how the risk of international projects can be assessed.Subsidiary versus Parent PerspectiveShould the capital budgeting for a multi-national project be conducted from the

3、 viewpoint of the subsidiary that will administer the project, or the parent that will provide most of the financing?The results may vary with the perspective taken because the net after-tax cash inflows to the parent can differ substantially from those to the subsidiary.Subsidiary versus Parent Per

4、spectiveThe difference in cash inflows is due to : Tax differentialsWhat is the tax rate on remitted funds?Regulations that restrict remittancesExcessive remittancesThe parent may charge its subsidiary very high administrative fees.Exchange rate movementsOnline ApplicationFor country-specific inform

5、ation such as general business rules, regulations and tax rates, visit:the Price Waterhouse Coopers site at /.pwcglobal4,/.us.kpmg/microsite/Global_Tax/CTR_Survey/index.htmlthe Yahoo! International Finance Center at /biz.yahoo/ifc/.Remitting Subsidiary Earnings to the ParentAfter-Tax Cash Flows Remi

6、tted by SubsidiaryCash Flows Generated by SubsidiaryAfter-Tax Cash Flows to SubsidiaryCash Flows Remitted by SubsidiaryWithholding Tax Paid to Host GovernmentRetained Earningsby SubsidiaryCorporate Taxes Paid to Host GovernmentConversion of Fundsto Parents CurrencyParentCash Flows to ParentSubsidiar

7、y versus Parent PerspectiveA parents perspective is appropriate when evaluating a project, since any project that can create a positive net present value for the parent should enhance the firms value.However, one exception to this rule may occur when the foreign subsidiary is not wholly owned by the

8、 parent.Input for MultinationalCapital BudgetingThe following forecasts are usually required:1.Initial investment2.Consumer demand3.Product price4.Variable cost5.Fixed cost6.Project lifetime7.Salvage (liquidation) valueInput for MultinationalCapital Budgeting9.Tax laws10.Exchange rates11.Required ra

9、te of returnThe following forecasts are usually required:8.Fund-transfer restrictionsOnline ApplicationWhat is the expected economic growth rate for a particular country? Consult the Country Commercial Guides prepared by embassy staff at /.usatrade.gov/website/ccg.nsf/ccghomepage?openform.Refer to t

10、he CIAs World Factbook at /.odci.gov/.MultinationalCapital BudgetingCapital budgeting is necessary for all long-term projects that deserve consideration. One common method of performing the analysis is to estimate the cash flows and salvage value to be received by the parent, and compute the net pre

11、sent value (NPV) of the project.MultinationalCapital BudgetingNPV= initial outlay n+ S cash flow in period t t =1 (1 + k )t+ salvage value (1 + k )nk = the required rate of return on the projectn = project lifetime in terms of periodsIf NPV > 0, the project can be accepted.Capital Budgeting Analy

12、sis Period t1.Demand(1)2.Price per unit(2)3.Total revenue(1)?(2)=(3)4.Variable cost per unit(4)5.Total variable cost (1)?(4)=(5)6.Annual lease expense(6)7.Other fixed periodic expenses(7)8.Noncash expense (depreciation)(8)9.Total expenses(5)+(6)+(7)+(8)=(9)10.Before-tax earnings of subsidiary(3)(9)=

13、(10)11.Host government taxtax rate?(10)=(11)12.After-tax earnings of subsidiary(10)(11)=(12)Capital Budgeting Analysis Period t13.Net cash flow to subsidiary (12)+(8)=(13)14.Remittance to parent(14)15.Tax on remitted fundstax rate?(14)=(15)16.Remittance after withheld tax(14)(15)=(16)17.Salvage valu

14、e(17)18.Exchange rate(18)19.Cash flow to parent(16)?(18)+(17)?(18)=(19)20.Investment by parent(20)21.Net cash flow to parent(19)(20)=(21)22.PV of net cash flow to parent(1+k) - t?(21)=(22)23.Cumulative NPV?PVs=(23)Factors to Consider in Multinational Capital BudgetingExchange rate fluctuations. Diff

15、erent scenarios should be considered together with their probability of occurrence.Inflation. Although price/cost forecasting implicitly considers inflation, inflation can be quite volatile from year to year for some countries.Factors to Consider in Multinational Capital BudgetingFinancing arrangeme

16、nt. Financing costs are usually captured by the discount rate. However, many foreign projects are partially financed by foreign subsidiaries. Blocked funds. Some countries may require that the earnings be reinvested locally for a certain period of time before they can be remitted to the parent.Facto

17、rs to Consider in Multinational Capital BudgetingUncertain salvage value. The salvage value typically has a significant impact on the projects NPV, and the MNC may want to compute the break-even salvage value.Impact of project on prevailing cash flows. The new investment may compete with the existin

18、g business for the same customers.Host government incentives. These should also be considered in the analysis.Adjusting Project Assessmentfor RiskIf an MNC is unsure of the cash flows of a proposed project, it needs to adjust its assessment for this risk.One method is to use a risk-adjusted discount

19、 rate. The greater the uncertainty, the larger the discount rate that is applied.Many computer software packages are also available to perform sensitivity analysis and simulation.Impact of Multinational Capital Budgetingon an MNCs ValueE (CFj,t )=expected cash flows in currency j to be received by t

20、he U.S. parent at the end of period tE (ERj,t )=expected exchange rate at which currency j can be converted to dollars at the end of period tk=weighted average cost of capital of the parentMultinational Capital Budgeting DecisionsChapter ReviewSubsidiary versus Parent PerspectiveTax DifferentialsRes

21、tricted RemittancesExcessive RemittancesExchange Rate MovementsInput for Multinational Capital BudgetingMultinational Capital BudgetingChapter ReviewFactors to Consider in Multinational Capital BudgetingExchange Rate FluctuationsInflationFinancing ArrangementBlocked FundsUncertain Salvage ValueImpact of Project on Prevailing Cash FlowsHost Government IncentivesChapter ReviewAdjusting Project Assessment for RiskRisk-Adjusted Discount RateSensitivity AnalysisSimulationImpact of Multinational Capital Budgeting on an MNCs Value