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Multinational Capital BudgetingMultinational Capital Budgeting
DEF: Selecting multinational assets & allocating the DEF: Selecting multinational assets & allocating the required funds with consideration of the following:required funds with consideration of the following:• Cheap loan from foreign governmentCheap loan from foreign government
• Foreign Exchange rate risk.Foreign Exchange rate risk.
• Multiple ties of taxation of different countriesMultiple ties of taxation of different countries
• Restrictions on repatriation of income.Restrictions on repatriation of income.
NPV=-CO+CFl (1+t)/(1+i)*t, where:NPV=-CO+CFl (1+t)/(1+i)*t, where:• NPV=Net Present ValueNPV=Net Present Value
• Co=cost of projectCo=cost of project
• E=Market value of equityE=Market value of equity
• CFl=Before tax expected cash flowCFl=Before tax expected cash flow
• t=tax ratet=tax rate
• I=WACC=interest rateI=WACC=interest rate
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Multinational Capital Budgeting Multinational Capital Budgeting cont..cont..
Factors Affecting Inventories Cash Flow: Factors Affecting Inventories Cash Flow: • Blocked Funds: Limitation of transfer of foreign exchange for trade or Blocked Funds: Limitation of transfer of foreign exchange for trade or
currency non-convertibility, if used for financing of the project, it alters currency non-convertibility, if used for financing of the project, it alters the cost of capital for the firm.the cost of capital for the firm.
• Remittance restriction: only remitted cash flow is relevant.Remittance restriction: only remitted cash flow is relevant.
• Differences in tax structure.Differences in tax structure.
• Concessionary loan.Concessionary loan.
• Effect on the sales of other divisionsEffect on the sales of other divisions
NPV=-CO+CFl (1+t)/(1+i)*t, where:NPV=-CO+CFl (1+t)/(1+i)*t, where:• NPV=Net Present ValueNPV=Net Present Value
• Co=cost of projectCo=cost of project
• E=Market value of equityE=Market value of equity
• CFl=Before tax expected cash flowCFl=Before tax expected cash flow
• t=tax ratet=tax rate
• I=WACC=interest rateI=WACC=interest rateMENU
Multinational Capital Budgeting Multinational Capital Budgeting cont..cont..
Calculation of Incremental Cash Flow: Calculation of Incremental Cash Flow: • Cash Flow associated with the projectCash Flow associated with the project
• Cost of CapitalCost of Capital
• Cash flow during the life of the project BCash flow during the life of the project B
Incremental Cash flow is different from total cash flow: Incremental Cash flow is different from total cash flow: • Cannibalization: new product taking sales away from existing productCannibalization: new product taking sales away from existing product
• Sales creation-opposite of cannibalizationSales creation-opposite of cannibalization
• Opportunity cost_windfall profit taxOpportunity cost_windfall profit tax
• Sunk costSunk cost
• Transfer pricingTransfer pricing
• National inflation difference, unexpected exchange rate, interest rate National inflation difference, unexpected exchange rate, interest rate difference, political & economical environment, anddifference, political & economical environment, and
• Difficulty in estimating terminal value.Difficulty in estimating terminal value.
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