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Chapter 14
Multinational Capital Budgeting
Lecture Outline
Subsidiary versus Parent Perspective
Tax Differentials
Restrictions on Remitted Earnings
Exchange Rate Movements
Input for Multinational Capital Budgeting
Multinational Capital Budgeting Example
Background
Analysis
Other Factors to Consider
Exchange Rate Fluctuations
Inflation
Financing Arrangement
Blocked Funds
Uncertain Salvage Value
Impact of Project on Prevailing Cash Flows
Host Government Incentives
Real Options
Adjusting Project Assessment for Risk
Risk-Adjusted Discount Rate
Sensitivity Analysis
Simulation
Multinational Capital Budgeting 2
Chapter Theme
This chapter identifies additional considerations in multinational capital budgeting versus domestic
capital budgeting. These considerations can either be explained briefly or illustrated with the use of an
example.
Topics to Stimulate Class Discussion
1. Create an idea for a firm to expand its operations overseas. Provide the industry of the firm. Given
this information, students should be requested to list all information that needs to be gathered in order
to conduct a capital budgeting analysis.
2. How should a firm adjust the capital budgeting analysis for investment in a country where the
currency is extremely volatile?
3. How should a firm adjust the capital budgeting for investment in a country where the chance of a
government takeover is relatively high?
POINT/COUNTER-POINT
Should MNCs Use Forward Rates to Estimate Dollar Cash Flows of Foreign
Projects?
POINT: Yes. An MNC’s parent should use the forward rate for each year in which it will receive net cash
flows in a foreign currency. The forward rate is market-determined and serves as a useful forecast for
future years.
COUNTER-POINT: No. An MNC should use its own forecasts for each year in which it will receive net
cash flows in a foreign currency. If the forward rates for future time periods are higher than the MNC’s
expected spot rates, the MNC may accept a project that it should not accept.
WHO IS CORRECT? Use the Internet to learn more about this issue. Which argument do you support?
Offer your own opinion on this issue.
ANSWER: An MNC should only use the forward rate in place of its expectations if it plans to hedge its
net cash flows in future periods. Of course, it must also consider the possibility of over-hedging its future
net cash flows in foreign currencies if it uses this strategy. When it assesses a project and does not hedge,
it should use its expected spot rates. However, it should compare its expected spot rates to the forward
rates and assess whether any large deviations of its expectations from the forward rate make sense.
