Question

Describe multinational capital budgeting. What are the factors to consider in multinational?

Answer 1

Answer:

Explanation:

Multinational capital budgeting, like traditional capital budgeting, focuses on cash inflows and outflows associated with long-term investments. Multinational capital budgeting techniques are used in foreign direct investment analysis.

Exchange rate fluctuations

Since it is difficult to accurately forecast

exchange rates, different scenarios can be

considered together with their probability of

occurrence.

Inflation

Although price/cost forecasting implicitly

considers inflation, inflation can be quite

volatile from year to year for some countries.

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.

Uncertain salvage value

Since the salvage value typically has a

significant impact on the project’s NPV, the

MNC may want to compute the break-even

salvage value.

Impact of project on prevailing cash flows

The new investment may compete with the

existing business for the same customers

Host government incentives

These should also be incorporated into the

analysis.

Real options

Some projects contain real options for additional

business opportunities.

The value of such a real option depends on the

probability of exercising the option and the

resulting NPV.