9 pages
Word Count
1069 words
Abilene Christian Univer
Course Code


January 9, 2021
Session 8:
International Capital Budgeting
Global Financial Management
Meng Gao
School of Business, University of Connecticut
The adjusted present value (APV) model that is suitable for an
MNC is the basic net present value (NPV) model expanded to
A) distinguish between the market value of a levered firm
and the market value of an unlevered firm.
B) discern the blocking of certain cash flows by the host
country from being legally remitted to the parent.
C) consider foreign currency fluctuations or extra taxes
imposed by the host country on foreign exchange
D) all of the options
Given the following information for a levered and unlevered firm, calculate
the difference in the cash flow available to investors. Assume the corporate
tax rate is 40 percent. (Hint: Calculate the tax savings arising from the tax
deductibility of interest payments).
A) $8
B) $18
C) $78
D) $90
Levered Unlevered
Revenue $ 250 $ 250
Operating cost −$ 100
Interest expense −$ 20 $ 0
Review of domestic capital budgeting
The adjusted present value model
Capital budgeting from the parent firm’s perspective
Risk adjustment in the capital budgeting analysis
Sensitivity analysis
Purchasing power parity assumption
Real options
Copyright © 2021 by the McGraw-Hill Companies, Inc. All rights reserved.
Consider a project with the following data
The 5-year project requires equipment that costs $100,000. If
undertaken, the shareholders will contribute $20,000 cash and
borrow $80,000 at 6% with an interest-only loan with a maturity
of 5 years and annual interest payments. The equipment will be
depreciated straight-line to zero over the 5-year life of the
project. There will be a pre-tax salvage value of $5,000. There
are no other start-up costs at year 0. During years 1 through 5,
the firm will sell 25,000 units of product at $5; variable costs are
$3; there are no fixed costs. Debt-to-equity ration is 4.
What is the NPV of the project using the WACC methodology?
What is the present value of the project using the APV
Q1: NPV vs APV
i=rdebt=6% requity=27.84%
τ=tax rate=34% rf=2%
Initial outlay
Equipment that costs $100,000
Financing decision:
$20,000 in equity; (re=27.84%)
$80,000 in debt (6% interest, 5 year)
CF years 1 through 5,
sell 25,000 units at $5
variable costs are $3; there are no fixed costs
straight-line to zero depreciation over 5 years (over $100,000)
Terminal value
pre-tax salvage value of $5,000
Tax rate: 34%
NPV: What is WACC?
APV: What is Ku?
NPV: What are FCFs during year 1 through 5?
APV: What are OCFs during year 1 through 5?
Q1: NPV vs APV (Cnt’d)
Capital Budgeting from the Parent Firms Perspective