Question 1

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.

Accepted Answer

A) True 
B) False

Question 2

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.

Accepted Answer

A) True 
 B)False

Question 3

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

Accepted Answer

A) higher; lower 
B) higher; higher 
C) lower; higher 
D) none of the above

Question 4

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:​

Accepted Answer

A) the subsidiary finances the entire investment by local borrowing. 
B) the subsidiary finances most of the investment by local borrowing. 
C) the parent finances most of the investment. 
D) the parent finances the entire investment.

Question 5

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?​

Accepted Answer

A) about NZ$11 million 
B) about NZ$15 million 
C) about NZ$31 million 
D) about NZ$37 million 
E) about NZ$25 million

Question 6

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

Accepted Answer

A) True 
 B)False

Question 7

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 ____.

Accepted Answer

A) appreciate; low 
B) appreciate; high 
C) depreciate; high 
D) depreciate; low

Question 8

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

Accepted Answer

A) determining a probability distribution of NPVs. 
B) determining the time required to achieve a positive NPV. 
C) determining how the required rate of return changes over time. 
D) determining how the cost of capital changes over time. 
E) A and B

Question 9

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 ____.

Accepted Answer

A) appreciates; decreases 
B) depreciates; is unaffected 
C) appreciates; is unaffected 
D) depreciates; decreases 
E) B and C

Question 10

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

Accepted Answer

A) True 
 B)False

Question 11

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?

Accepted Answer

A) -$803,848 
B) $5,803,848 
C) $1,048,829 
D) none of the above

Question 12

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:​

Accepted Answer

A) the taxes are the same as in the United States. 
B) there are no blocked fund restrictions. 
C) the currency of the host country is expected to depreciate consistently. 
D) none of the above; a discrepancy is not possible.

Question 13

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.

Accepted Answer

A) adversely; adversely 
B) favorably; adversely 
C) favorably; favorably 
D) adversely; favorably

Question 14

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:​

Accepted Answer

A) the cost of borrowing funds in the United Kingdom. 
B) the economic conditions in the United Kingdom. 
C) the parent's cost of capital. 
D) A and B

Question 15

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

Accepted Answer

A) future inflation 
B) blocked funds 
C) exchange rates 
D) all of the above

Question 16

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.

Accepted Answer

A) True 
 B)False

Question 17

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.

Accepted Answer

A) True 
 B)False

Question 18

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 ____.

Accepted Answer

A) appreciate; low 
B) appreciate; high 
C) depreciate; high 
D) depreciate; low

Question 19

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?​

Accepted Answer

A) corporate income taxes 
B) withholding taxes 
C) provisions for carrybacks and carryforwards 
D) tax treaties 
E) all of the above are characteristics to be considered.

Question 20

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 ____.

Accepted Answer

A) fixed 
B) volatile 
C) stable 
D) none of the above, as the firm is not exposed

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:

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.

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:

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 ____.

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:​

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.

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:​

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 ____.

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:

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 .

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:

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?

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?