Exam 18: Multinational Capital Budgeting and Cross-Border Acquisitions

Real option analysis treats cash flows in terms of future value in a positive sense, whereas DCF treats future cash flows negatively.

When evaluating capital budgeting projects, which of the following would NOT necessarily be an indicator of an acceptable project?

Project evaluation from the ________ viewpoint serves some useful purposes and/but should ________ the ________ viewpoint.

When estimating a firm's cost of equity capital using the CAPM, you need to estimate:

Real option analysis is a particularly powerful device when addressing potential investment projects with extremely long life spans or investments that do not commence until future dates.

For purposes of international capital budgeting, which of the following statements is NOT true?

For purposes of international capital budgeting, evaluation of a project from the PARENT viewpoint serves some useful purposes, but it should be subordinated to evaluation from the LOCAL's viewpoint.

Multinational firms should invest only if they can earn a risk-adjusted return greater than locally based competitors can earn on the same project.

The level of debt places an enormous burden on cash flow for debt service and requires a number of additional levels of risk reduction.

In project finance, retained earnings and the reinvestment of earnings are the most important decisions to guarantee the long-term growth of the project's value.

It is important that firms adopt a common standard for the capital budgeting process for choosing among foreign and domestic projects.

Real option analysis allows managers to analyze all of the following EXCEPT:

The predictability of the project's revenue stream is essential in securing project financing. Which of the following is NOT a typical contract provisions that are intended to assure adequate cash flow?

Use the information to answer the following question(s). The Velo Rapid Revolutions Inc., a company that produces bicycles, elliptical trainers, scooters and other wheeled non-motorized recreational equipment, is considering an expansion of their product line to Europe. The expansion would require a purchase of equipment with a price of €1,200,000 and additional installation of €300,000 (assume that the installation costs cannot be expensed, but rather, must be depreciated over the life of the asset). Because this would be a new product, they will not be replacing existing equipment. The new product line is expected to increase revenues by €600,000 per year over current levels for the next 5 years, however; expenses will also increase by €200,000 per year. (Note: Assume the after-tax operating cash flows in years 1-5 are equal, and that the terminal value of the project in year 5 may change total after-tax cash flows for that year.) The equipment is multipurpose and the firm anticipates that they will sell it at the end of the five years for €500,000. The firm's required rate of return is 12% and they are in the 40% tax bracket. Depreciation is straight-line to a value of euro 0 over the 5-year life of the equipment, and the initial investment (at year 0) also requires an increase in NWC of €100,000 (to be recovered at the sale of the equipment at the end of five years). The current spot rate is $0.95/euro, and the expected inflation rate in the U.S. is 4% per year and 3% per year in Europe. -Refer to Instruction 18.1. In euros, what is the NPV of the Velo Rapid Revolutions expansion?

Which of the following is NOT an advantage of cross-border acquisitions over greenfield investments?

In international capital budgeting, the appropriate discount rate for determining the present value of the expected cash flows is always the firm's domestic WACC.

________ is the risk that a foreign government will place restrictions such as limiting the amount of funds that can be remitted to the parent firm, or even expropriation of cash flows earned in that country.

Which of the following is NOT a reason given for international mergers and acquisitions?

As opposed to greenfield investment, a cross-border acquisition is typically quicker.

The only proper way to estimate the NPV of a foreign project is to discount the appropriate cash flows first and then convert them to the domestic currency at the current spot rate.