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Capital Budgeting for Multinationals

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Capital Budgeting for Multinationals
CAPITAL BUDGETING FOR MULTINATIONALS
13.1 INTRODUCTION
Although the original decision to undertake an investment in a particular foreign country may be the outcome of combination of strategic, behavioural and economic considerations, choice of a specific project within a particular product-market posture calls for evaluation of its economic feasibility. For this purpose, capital budgeting exercise has to be done. A firm should deploy funds in a project if the marginal revenue obtained there from exceeds the marginal cost. For an MNC, capital budgeting involves economic analysis of the firm's direct investment opportunities. Whatever be the motive for Direct Foreign Investment (DFI), an MNC's very survival and sustainable competitive position depends on its ability to identify and choose the most profitable investment opportunity. Capital budgeting technique provides the mechanism to identify opportunities and evaluate their economic viability. This is why MNCs evaluate international projects by using capital budgeting techniques. Proper use of capital budgeting techniques can help the firm in identifying the international projects worthy of implementation from those that are not.
13.2 FUNDAMENTALS OF EVALUATING FOREIGN PROJECTS
Once a firm has compiled a list of prospective investments, it uses capital budgeting techniques to select from among them that combination of projects that maximizes the firm's value to shareholders. The theoretical framework involved in evaluation of domestic projects is the same as for foreign projects and various considerations influencing choice of a project within the country are the, same as those for projects overseas. However, there are a host of factors which are unique to foreign investments that make cross-border investment decisions complicated.
The basic steps involved in evaluation of a project are:
1. Determine net investment outlay;
2. Estimate net cash flows to be derived from the project over time, including
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