Exam 18: Multinational Capital Budgeting and Cross-Border Acquisitions

________ 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.

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.

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 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 18.1.In euros,what is the NPV of the Velo Rapid Revolutions expansion?

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 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 18.1.What is the initial investment for the Velo Rapid Revolutions project?

Which of the following is NOT a typical pitfall of cross-border acquisitions?

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?

When engaged in international capital budgeting,the analyst must identify the initial amount of capital invested or put at risk.

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

Given a current spot rate of 8.10 Norwegian krone per U.S.dollar,expected inflation rates of 3% in Norway and 6% 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.

When assessing the additional risk that can occur from investing abroad firms may choose to account for risk via:

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.

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

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

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

Which of the following is NOT a characteristic of international long-term capital project financing?

For purposes of international capital budgeting,parent cash flows often depend on the form of financing.Thus,we cannot clearly separate cash flows from financing decisions,as we can in domestic capital budgeting.

When dealing with international capital budgeting projects,the value of the project is NOT sensitive to the firm's cost of capital.

Affiliate firms are consolidated on the parent's financial statements on a ________ basis.

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.

Of the following capital budgeting decision criteria,which does NOT use discounted cash flows?