ifm project

8/7/2019 ifm project

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INTERNATIONAL PROJECT

APPRAISAL


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RECENT GLOBAL TRENDS

FDI has been the major driving force towardsglobalization

Cross border M&A have also added to the CAUSE

Acquisitions bring major benefit

1)Existing customers

2)Foothold in destination market

4)Niche technologies to the company


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SOME OF THE APPROACHES TO VALUE

A DOMESTIC INVESTMENT


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ADJUSTED PRESENT VALUE(APV)

FRAMEWORK

Its a two step process:

1)Evaluate the project as if it is financed entirely by

equity .The rate of discount is the required rate of

return on equity corresponding to the risk class of

the project.

2)Add the present values of any cashflows arising

out of special financing features the rate of discount

should reflect the risk assoicated with each of the

cash flows.


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PROJECT APPRAISAL INTHE INTERNATIONAL

CONTEXT


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MAIN HURDLES DIFFERENTIATING A

FOREIGN PROJECT

EXCHANGE RATE AND CAPITAL MARKET

SEGMENTATION

POLITICAL OR COUNTRY RISK

INTERNATIONAL TAXATIONBLOCKED FUNDS


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EXCHANGE RATE RISK AND CAPITAL

MARKET SEGMENTATION

Since cashflows from a foreign project are

in foreign currency and therfore subject to

forex risk.

How to incorporate this in project valuation?Also what is the appropriate cost of capital

when the host and home country forex

markets are not integrated?


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POLITICAL OR COUNTRY RISK

Assets allocated abroad are subject to risk ofappropriation or nationalization by the host country govt

.Also there may be changes in withholding taxes,

remittances by the subsidiary to the parent.

Hence the main issue lies in incorporating these risks in

evaluating the project??


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INTERNATIONAL TAXATION

In most of the cases there might be the situation ofwithholding taxes on dividends and other income remitted

to the parent.

In addition, the home country government may tax this

income in the hands of the parent.

If double taxation avoidance treaty is there ,the parent may

obtain special credit for the taxes abroad.

There is also a related issue of transfer pricing which may

enable the parent to furthur reduce the overall tax burden.


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BLOCKED FUNDS

Sometimes , a foreign project can become an attractiveproposal because the parent has some funds

accumulated in a foreign country which cant be taken

out .

Investing these funds locally in a subsidiary or a JV may

then represent a better use of blocked funds.


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REASONS FORCONSIDERING INTRA-

CORPORATE FINANCING

FROM EXTERNAL FINANCING


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THE THREE REASONS!!!

1)Intra corporate financing effects can be

estimated separately from external financing.

2) The nature of internal financing arrangements is

sensitive to the particular features of the tax laws in

the host and home country3)It forces the company to keep in mind that intra-

corporate financing impinges only on the allocation

of the profits between the parent and the subsidiary

and not a net gain or loss.


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EXAMPLE:

Titus ltd is considering a proposal to set up a fully owned manufacturing andsales subsidiary in Zimbabwe to serve the African and Middle-eastern

markets as well as to make a foray into the European market . Proposed

Quartz plant in Zimbabwe

Intial inv=Z$ 50,000,000

Balance of Z$ 50,000,000 in a local bank from its earlier export sales .this

can be repatriated to India after paying 48% tax.Comparable watches imported from europe and japan are currently sold at

Z$180 per watch.

The operating cost are estimated to be

Materials : Z$120.00 per watch

Labour : Z$25.00 per watch

Selling and other expenses : Z$ 5.00 per watch

Documents

ifm project