Exam 14: Multinational Capital Budgeting

Because before-tax cash flows are necessary for an adequate capital budgeting analysis, international tax effects need not be determined for a proposed foreign project.

No matter what the probability distribution of future exchange rates is, as long as one out of several scenarios results in a negative net present value (NPV), a project should not be accepted.

Everything else being equal, the ____ the depreciation expense is in a given year, the ____ a foreign project's NPV will be.

Assume an MNC establishes a subsidiary in a country where it has no other existing business. The present value of parent cash flows from this subsidiary is more sensitive to exchange rate movements when:​

An MNC is considering establishing a two-year project in New Zealand with a $30 million initial investment. The firm's cost of capital is 12 percent. The required rate of return on this project is 18 percent. The project is expected to generate cash flows of NZ$12 million in Year 1 and NZ$30 million in Year 2, excluding the salvage value. Assume no taxes and a stable exchange rate of $.60 per NZ$ over the next two years. All cash flows are remitted to the parent. What is the break-even salvage value?​

In conducting a multinational capital budgeting analysis, the subsidiary's perspective should always be used.

Other things being equal, firms from a particular home country will engage in more international acquisitions if they expect foreign currencies to ____ against their home currency, and if their cost of capital is relatively ____.

In capital budgeting analysis, the use of a cumulative NPV is useful for:​

Assume a U.S.-based MNC has a Chilean subsidiary that annually remits 30 million Chilean pesos to the United States. If the peso ____, the dollar amount of remitted funds ____.

Sometimes, a multinational project may appear feasible from the subsidiary's perspective but not from the parent's perspective and vice versa.

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. What is the net present value of the Norwegian project?

The discrepancy between the feasibility of a project in a host country from the perspective of the U.S. parent versus the subsidiary administering the project is likely to be greater for projects in countries where:​

If an MNC exports to a country and then establishes a subsidiary to produce and sell the same product in that country, cash flows from existing operations would likely be ____ affected by the project. If an MNC establishes a foreign manufacturing subsidiary that buys components from the parent, the cash flows from existing operations would likely be ____ affected by the project.

Assume the parent of a U.S.-based MNC plans to completely finance the establishment of its British subsidiary with existing funds from retained earnings from U.S. operations. According to the text, the discount rate used in the capital budgeting analysis on this project will be most affected by:​

When evaluating international project cash flows, which of the following factors is relevant?​

If partial financing is provided by the foreign subsidiary, including foreign interest payments in the cash flow analysis may avoid overstatement of the estimated foreign cash flows.

Some capital budgeting projects contain real options in that they provide opportunities to obtain or eliminate specified real assets such as machinery or a manufacturing plant.

Other things being equal, a blocked funds restriction is more likely to have a significant adverse effect on a project if the currency of that country is expected to ____ over time, and if the interest rate in that country is relatively ____.

Which of the following is not a characteristic of a tax system that an MNC that would consider when conducting a tax assessment of a country?​

A firm considers an exporting project and will invoice the exports in dollars. Estimating the expected cash flows in dollars would be more difficult if the currency of the foreign country is ____.