Exam 19: Multinational Capital Budgeting

Empirical evidence shows that foreign direct investment always increases a U.S. firm's cost capital no matter where the foreign investment is made.

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

Project finance is characterized by which of the following features?

________ 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.

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.

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

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 IRR of the Wheel Deal expansion?

If a firm undertakes a project with ordinary cash flows and estimates that the firm has a positive NPV, then the IRR will be ________.

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. In euros, what is the NPV of the Wheel Deal expansion?

Chemical Magic of New Orleans, Louisiana expects to receive dividends each year from a foreign subsidiary for the next 3 years. The dividend is expected to grow at a rate of 5% per year. If the euro depreciates in value against the dollar at a rate of 4% per year over the life of the dividends, then the present value of the euro dividends to Chemical Magic will be ________ if there had been no change in the relative values of the euro and dollar.

Your company just received a $500,000 cash remittance from its British subsidiary. If the risk-free one-year T-bill rate is 4.5% and the current exchange rate is $1.45/£, and the one-year forward rate is $1.44/£, then the present value of the remittance is ________.

Hydrotech Manufacturing of Houston Texas expects to receive dividends each year from a foreign subsidiary for the next 5 years. The dividend is expected to grow at a rate of 7% per year. If the euro appreciates in value against the dollar at a rate of 2% per year over the life of the dividends, then the present value of the euro dividends to Hydrotech will be ________ if there had been no change in the relative values of the euro and dollar.

Given a current spot rate of 8.10 Norwegian krone per U.S. dollar, expected inflation rates of 6% in Norway and 3% per annum in the U.S., use the formula for relative purchasing power parity to estimate the one-year spot rate of krone per dollar.

Which of the following is NOT a reason why capital budgeting for a foreign project is more complex than for a domestic project?

Generally speaking, a firm wants to receive cash flows from a currency that is ________ relative to their own, and pay out in currencies that are ________ relative to their home currency.

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. The European expansion would have a greater NPV in dollar terms if the euro appreciated in value over the five-year life of the project and the project had a positive NPV, other things equal.

Of the following, which would NOT be considered an initial outlay at time 0 (today)?

Machintosh Outerwear of Canada is a large retailer of high quality outdoor recreation equipment, clothing, and accessories. They are considering opening three U.S. stores in Minneapolis, Spokane, and Seattle. The current cost of a new store in Canada is C$1,000,000 per year and expected construction costs in the U.S. are expected to increase at a rate of 15% per year. The U.S.stores will be built in one year, the current exchange rate is $1.02/C$, the forward rate is $1.04/C$. If the stores are built in one year and the firm has a required rate of return of 14%, what is the present value in Canadian dollars of building the new stores?

Which of the following is NOT a risk commensurate with international investments?

For financial reporting purposes, U.S. firms must consolidate the earnings of any subsidiary that is over ________ owned.