Answered: Capital budgeting for a foreign project…

Capital budgeting for a foreign project is considerably more complex than the domestic case. Discuss FIVE major factors contribute to this greater complexities.

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter14: Multinational Capital Budgeting

Section: Chapter Questions

Problem 6ST

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Production Budget

A budget can be defined as a financial plan designed by an undertaking for a definite period in the future that can contribute towards enhancing the financial success of the business undertaking. It is used to estimate the revenue and expenses. The budget generally takes into account both current and future income and expenses.

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Explain how political risk and exchange rate risk increase the uncertainty of international projects for the purpose of capital budgeting.
There are various risk factors that complicate multinational capital budgeting process . List examples of the risk factors and briefly explain .
Explain the differences of two: Domestic Capital Budgeting and Multinational Capital Budgeting
Capital budgeting can be affected by factors such as exchange rate risk, political risk, transfer pricing, and strategic risk. Select a mid- or large-sized business organization and explain how each of these factors can affect its capital budgeting. Which factor poses the greatest threat to your selected organization and why? What measures can stakeholders take to reduce adverse impacts of these factors?
Why might the cost of capital for a foreign project differ from thatof an equivalent domestic project? Could it be lower?
2) explain the differences between the following two fundamental factors of finance in international processes -The international transfer of funds - Transfer prices
9. International capital budgeting Aa Aa One of the important components of multinational capital budgeting is to analyze the cash flows generated from subsidiary companies. Foreign governments often have restrictions on the amount of cash flows that the subsidiary company can repatriate to the parent company. Companies use different techniques to work around the restrictions. One such method is transfer pricing, which involves the subsidiary company obtaining raw materials from: A local vendor at a very low cost so that there is more profit left to repatriate The parent company at a high cost so that there is less profit left to repatriate The parent company at a very cost so that ther is more profit left to repatriate Consider this case: Sacramone Products Co. is a U.S. firm evaluating a project in Australia. You have the following information about the project: The project requires an investment of AU$800,000 today and is expected to generate cash flows of AU$900,000 at the end of…
What do managers use to evaluate domestic and international capital investment projects? A) capital budgeting B) multilateral netting C) net present value D) transfer pricing E) parent's perspective
One of the important components of multinational capital budgeting is to analyze the cash flows generated from subsidiary companies. Foreign governments often have restrictions on the amount of cash that the subsidiary can repatriate to the parent company. Companies use different techniques to work around the restrictions. One such method is transfer pricing, which involves the subsidiary company obtaining raw materials from O The parent company at a high cost so that there is less profit left to repatriate. A local vendor at a very low cost so that there is more profit to repatriate. O The parent company at a very low cost so that there is more profit left to repatriate. Consider this case: LeBron Development Inc. is a U.S. firm evaluating a project in Australia. You have the following information about the project The project requires an investment of AU$800,000 today and is expected to generate cash flows of AU$1,000,000 at the end of each of the next two years. The current exchange…
Why might the cost of capital for a foreign project differ from that of an equivalentdomestic project? Could it be lower? Explain.
Which of the statements below is FALSE? A. Multinational capital budgeting is a straightforward application of the Net Present Value (NPV. model with one twist: we can do the analysis in either domestic currency or foreign currency. B. If we are using foreign currency for the NPV decision, all we have to do is restate all the foreign incremental cash flow in terms of future value and use the current exchange rate. C. In conducting a multinational NPV, one must be careful to avoid differences with rounding of exchange rates, discount rates, and cash flow to produce the exact same value. D. With the foreign currency approach in NPV analysis, if we know the appropriate discount rate in the home country and the expected inflation rates in the two countries, we can determine the appropriate foreign discount rate.
1. Why is the WACC used in capital budgeting?