Exam 14: Multinational Capital Budgeting

When conducting a capital budgeting analysis and attempting to account for effects of exchange rate movements for a foreign project, inflation ____ included explicitly in the cash flow analysis, and debt payments by the subsidiary ____ included explicitly in the cash flow analysis.

Exhibit 14-1 Assume that Baps Corp. is considering the establishment of a subsidiary in Norway. The initial investment required by the parent is $5 million. If the project is undertaken, Baps would terminate the project aFter four years. Baps's cost of capital is 13 percent, and the project has the same risk as Baps's existing projects. All cash flows generated from the project will be remitted to the parent at the end of each year. Listed below are the estimated cash flows the Norwegian subsidiary will generate over the project's lifetime in Norwegian kroner (NOK): -Refer to Exhibit 14-1. Baps is also uncertain regarding the cost of capital. Recently, Norway has experienced some political turmoil. What is the net present value (NPV) of this project if a 16 percent cost of capital is used instead of 13 percent?

Which of the following is not a factor that should be considered in multinational capital budgeting?​

Holding other factors constant, an international project's NPV is ____ related to the size of the initial investment and ____ related to the project's required rate of return.

If a multinational project is assessed from the subsidiary's perspective, withholding taxes are ignored for project assessment.

Which of the following is not true regarding simulation?​

In multinational capital budgeting, depreciation is treated as a cash outflow.

According to the text, in order to develop a distribution of possible net present values from international projects, a firm should use:

As the financing of a foreign project by the parent ____ relative to the financing provided by the subsidiary, the parent's exchange rate exposure ____.

If a subsidiary project is assessed from the subsidiary's perspective, then an expected appreciation in the foreign currency will affect the feasibility of the project ____.

The greater the uncertainty about a project's forecasted cash flows, the larger should be the discount rate applied to cash flows, other things being equal.

When a foreign subsidiary is not wholly owned by the parent and a foreign project is partially financed with retained earnings of the parent and of the subsidiary, then:​

Petrus Co. has a unique opportunity to invest in a two-year project in Australia. The project is expected to generate 1,000,000 Australian dollars (A$) in the first year and A$2,000,000 in the second. Petrus would have to invest $1,500,000 in the project. Petrus has determined that the cost of capital for similar projects is 14 percent. What is the net present value of this project if the spot rate of the Australian dollar for the two years is forecasted to be $.55 and $.60, respectively?​

____ is not a method of incorporating an adjustment for risk into the capital budgeting analysis.

The ____ is (are) likely the major source of funds to support a particular project.

A foreign project in Hungary and another in Japan had the same perceived value from the U.S. parent's perspective. Then, the exchange rate expectations were revised, upward for the value of the Hungarian forint and downward for the Japanese yen. The break-even salvage value for the project in Japan would now be ____ from the parent's perspective.

The feasibility of a multinational project from the parent's perspective is dependent not on the subsidiary cash flows but on the cash flows that it ultimately receives.

____ can cause the parent's aFter-tax cash flows to differ from the subsidiary's aFter-tax cash flows.

The break-even salvage value of a particular project is the salvage value necessary to:​

The objective of sensitivity analysis in capital budgeting is to determine how sensitive the NPV is to alternative values of the input variables.