Multinational Capital Budgeting and their risks explain plz Solution Multination

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Multinational Capital Budgeting Capital budgeting is necessary for all long-term projects that deserve consideration. One common method of performing the analysis is to estimate the cash flows and salvage value to be received by the parent, and compute the net present value (NPV) of the project NPV = – initial outlay n + S cash flow in period t t =1 (1 + k )t + salvage value (1 + k )n k = the required rate of return on the project n = project lifetime in terms of periods If NPV > 0, the project can be accepted. Capital Budgeting Analysis 1. Demand (1) 2. Price per unit (2) 3. Total revenue (1)?(2)=(3) 4. Variable cost per unit (4) 5. Total variable cost (1)?(4)=(5) 6. Annual lease expense (6) 7. Other fixed periodic expenses (7) 8. Noncash expense (depreciation) (8) 9. Total expenses (5)+(6)+(7)+(8)=(9) 10. Before-tax earnings of subsidiary (3)–(9)=(10) 11. Host government tax tax rate?(10)=(11) 12. After-tax earnings of subsidiary (10)–(11)=(12) 13. Net cash flow to subsidiary (12)+(8)=(13) 14. Remittance to parent (14) 15. Tax on remitted funds tax rate?(14)=(15) 16. Remittance after withheld tax (14)–(15)=(16) 17. Salvage value (17) 18. Exchange rate (18) 19. Cash flow to parent (16)?(18)+(17)?(18)=(19) 20. Investment by parent (20) 21. Net cash flow to parent (19)–(20)=(21) 22. PV of net cash flow to parent (1+k) - t?(21)=(22) 23. Cumulative NPV Factors to Consider in Multinational Capital Budgeting Exchange rate fluctuations. Different scenarios should 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, many foreign projects are partially financed by foreign subsidiaries. Blocked funds. Some countries may require that the earnings be reinvested locally for a certain period of time before they can be remitted to the parent. Uncertain salvage value. The salvage value typically has a significant impact on the project’s NPV, and 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 considered in the analysis Adjusting Project Assessmentfor Risk If an MNC is unsure of the cash flows of a proposed project, it needs to adjust its assessment for this risk. One method is to use a risk-adjusted discount rate. The greater the uncertainty, the larger the discount rate that is applied. Many computer software packages are also available to perform sensitivity analysis and simulation thank you

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