Exam 19: Multinational Capital Budgeting

Which of the following considerations is NOT important for a parent firm when considering foreign investment?

Instruction 19.1: Use the information for following question(s). The Wheel Deal Inc., a company that produces 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 euro 1,200,000 and additional installation of euro 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 euro 600,000 per year over current levels for the next 5 years, however; expenses will also increase by euro 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 euro 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 euro 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 19.1. What are the annual after-tax cash flows for the Wheel Deal project?

Which is NOT considered a shortcoming of the parent simply adjusting discount rates to account for the additional risk that stems from a project's foreign location?

An international investment opportunity should be rejected if

When a parent corporation performs a capital budgeting analysis, the additional risks due to the foreign location of a project should generally be handled by

When determining a firm's weighted average cost of capital (wacc) which of the following terms is NOT necessary?

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

A Mexican firm wishes to build a new plant in the USA in one year. The cost in Mexican pesos will be greater if the peso appreciates against the USD in the interim and the Mexican firm does not hedge.

Generally speaking a firm's cost of ________ capital is greater than the firm's ________.

There are no important differences between domestic and international capital budgeting methods.

Cash flows to parents are ultimately the basis for dividends to stockholders, reinvestment elsewhere in the world, repayment of corporate-wide debt, and other proposals that affect the firm's many interest groups. Therefore, analysis of any foreign project should be from the viewpoint of the ________.

Instruction 19.1: Use the information for following question(s). The Wheel Deal Inc., a company that produces 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 euro 1,200,000 and additional installation of euro 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 euro 600,000 per year over current levels for the next 5 years, however; expenses will also increase by euro 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 euro 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 euro 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 19.1. What is the initial investment for the Wheel Deal project?

Which of the following is NOT a basic step in the capital budgeting process?

Instruction 19.1: Use the information for following question(s). The Wheel Deal Inc., a company that produces 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 euro 1,200,000 and additional installation of euro 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 euro 600,000 per year over current levels for the next 5 years, however; expenses will also increase by euro 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 euro 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 euro 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 19.1. What is the NPV of the European expansion if Wheel Deal first computes the NPV in euros and then converts that figure to dollars using the current spot rate?

An alternative to traditional discounted cash flow models is ________.

Which of the following is NOT an example of political risk?

The authors highlight a strong theoretical argument in favor of analyzing any foreign project from the viewpoint of the parent. Provide at least three reasons why the parent's viewpoint is superior to the local viewpoint and give an example of when the local viewpoint fails to maximize the value of the firm.

A German firm wishes to build a new plant in the USA in one year. The cost in euros will be greater if the euro depreciates against the USD in the interim and the German firm does not hedge.

TABLE 19.1 Use the information to answer following question(s). Jensen Aquatics Inc., which manufactures and sells scuba gear worldwide, is considering an investment in either Europe or Great Britain. Consider the following cash flows for each project, assume a 12% wacc, and consider these to be average risk projects for the firm. Answer the questions that follow. -Refer to Table 19.1. If the euro was forecast to remain constant at $1.00/euro throughout the investment period, how would the investment decision now be characterized?

Benson Manufacturing has an after-tax cost of debt of 7% and a cost of equity of 12%. If Benson is in a 30% tax bracket, and finances 40% of assets with debt, what is the firm's wacc?