Lecture 14 - Multinational capital budgeting. This chapter’s objectives are to: To compare the capital budgeting analysis of an MNC’s subsidiary with that of its parent; to demonstrate how multinational capital budgeting can be applied to determine whether an international project should be implemented; and to explain how the risk of international projects can be assessed. | Multinational Capital Budgeting 14 Lecture Chapter Objectives To compare the capital budgeting analysis of an MNC’s subsidiary with that of its parent; To demonstrate how multinational capital budgeting can be applied to determine whether an international project should be implemented; and To explain how the risk of international projects can be assessed. Subsidiary versus Parent Perspective Should the capital budgeting for a multi-national project be conducted from the viewpoint of the subsidiary that will administer the project, or the parent that will provide most of the financing? The results may vary with the perspective taken because the net after-tax cash inflows to the parent can differ substantially from those to the subsidiary. Subsidiary versus Parent Perspective Such differences can be due to: Tax differentials What is the tax rate on remitted funds? Regulations that restrict remittances Excessive remittances The parent may charge its subsidiary very high administrative . | Multinational Capital Budgeting 14 Lecture Chapter Objectives To compare the capital budgeting analysis of an MNC’s subsidiary with that of its parent; To demonstrate how multinational capital budgeting can be applied to determine whether an international project should be implemented; and To explain how the risk of international projects can be assessed. Subsidiary versus Parent Perspective Should the capital budgeting for a multi-national project be conducted from the viewpoint of the subsidiary that will administer the project, or the parent that will provide most of the financing? The results may vary with the perspective taken because the net after-tax cash inflows to the parent can differ substantially from those to the subsidiary. Subsidiary versus Parent Perspective Such differences can be due to: Tax differentials What is the tax rate on remitted funds? Regulations that restrict remittances Excessive remittances The parent may charge its subsidiary very high administrative fees. Exchange rate movements Remitting Subsidiary Earnings to the Parent Conversion of Funds to Parent’s Currency Parent Cash Flows to Parent Corporate Taxes Paid to Host Government Retained Earnings by Subsidiary After-Tax Cash Flows Remitted by Subsidiary Withholding Tax Paid to Host Government Cash Flows Remitted by Subsidiary After-Tax Cash Flows to Subsidiary Cash Flows Generated by Subsidiary A parent’s perspective is appropriate when evaluating a project, since any project that can create a positive net present value for the parent should enhance the firm’s value. However, one exception to this rule occurs when the foreign subsidiary is not wholly owned by the parent. Subsidiary versus Parent Perspective Input for Multinational Capital Budgeting The following forecasts are usually required: 1. Initial investment 2. Consumer demand over time 3. Product price over time 4. Variable cost over time 5. Fixed cost over time 6. Project lifetime 7. Salvage (liquidation) value The .
