Lecture Multinational financial management: Lecture 15 - Dr. Umara Noreen

Lecture

15

Multinational Capital Budgeting


Chapter Objectives


To compare the capital budgeting
analysis of an MNC’s subsidiary with that
of its parent;



To demonstrate how multinational capital
budgeting can be applied to determine
whether an international project should be
implemented; and



To explain how the risk of international
projects can be assessed.
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Multinational
Capital Budgeting
Example:

• Spartan, Inc. is considering the
development of a subsidiary in Singapore
that will manufacture and sell tennis
rackets locally.

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Capital Budgeting Analysis: Spartan, Inc.

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Capital Budgeting Analysis: Spartan, Inc.

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Capital Budgeting Analysis
1.
2.
3.
4.
5.
6.
7.

Period t
Demand

(1)
Price per unit
(2)
Total revenue
(1) (2)=(3)
Variable cost per unit
(4)
Total variable cost
(1) (4)=(5)
Annual lease expense
(6)
Other fixed annual expenses

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Capital Budgeting Analysis
13.
14.
15.
16.
17.
18.
19.

Period t
Net cash flow to subsidiary
(12)+(8)=(13)
Remittance to parent
(14)

Tax on remitted funds
tax rate (14)=(15)
Remittance after withheld tax
(14)–(15)=(16)
Salvage value
(17)
Exchange rate
(18)
Cash flow to parent

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Factors to Consider in
Multinational Capital Budgeting
 Exchange rate fluctuations

Since it is difficult to accurately forecast
exchange rates, different scenarios can be
considered together with their probability
of occurrence.

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Analysis Using Different Exchange Rate
Scenarios: Spartan, Inc.

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Sensitivity of the
Project’s NPV to
Different
Exchange Rate
Scenarios:
Spartan, Inc.

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Factors to Consider in
Multinational Capital Budgeting
 Inflation

Although price/cost forecasting implicitly
considers inflation, inflation can be quite
volatile from year to year for some
countries.

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Factors to Consider in
Multinational Capital Budgeting
 Financing arrangement

Financing costs are usually captured by
the discount rate.
However, when foreign projects are

partially financed by foreign subsidiaries,
a more accurate approach is to separate
the subsidiary investment and explicitly
consider foreign loan payments as cash
outflows.
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Factors to Consider in
Multinational Capital Budgeting
 Blocked funds

Some countries require that the earnings
generated by the subsidiary be reinvested
locally for at least a certain period of time
before they can be remitted to the parent.

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Capital Budgeting with Blocked Funds: Spartan, Inc.
Assume that all funds are blocked until the subsidiary is sold.

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• Source: Adopted from SouthWestern/Thomson Learning © 2006

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