Multinational Capital Budgeting (External)

Multinational Capital Budgeting
International Financial Management
Dr. A. DeMaskey

Learning Objectives
 How does domestic capital budgeting differ from

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multinational capital budgeting? How do incremental cash flows differ from total project cash flows? What is the difference between foreign project cash flows and parent cash flows? How does APV analysis differ from NPV analysis? How is the capital budgeting analysis adjusted for the additional economic and political risks? What is real option analysis?

Complexities of Capital Budgeting for a Foreign Project
 Several factors make budgeting for a foreign project

more complex
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Parent cash flows must be distinguished from project Parent cash flows often depend on the form of financing, thus cannot clearly separate cash flows from financing Additional cash flows from new investment may in part or in whole take away from another subsidiary; thus as stand alone may provide cash flows but overall adds no value to entire organization Parent must recognize remittances from foreign investment because of differing tax systems, legal and political constraints

Complexities of Capital Budgeting for a Foreign Project
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An array of non-financial payments can generate cash flows to parent in form of licensing fees, royalty payments, etc. Managers must anticipate differing rates of national inflation which can affect differing cash flows Use of segmented national capital markets may create opportunity for financial gain or additional costs Use of host government subsidies complicates capital structure and parent’s ability to determine appropriate WACC Managers must evaluate political risk Terminal value is more difficult to estimate because potential purchasers have widely divergent views

Traditional Capital Budgeting Analysis
 NPV Analysis

CFt TV n NPV     I0 t n (1  k ) t 1 (1  k )
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n

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If Projects are independent, those with