Use the Internet and/or Strayer Learning Resource Center to research capital inv
ID: 2425819 • Letter: U
Question
Use the Internet and/or Strayer Learning Resource Center to research capital investments in global markets. Next, analyze the main factors that an organization should consider in determining the required rate of return for evaluating projects in global markets and the impact that this will have on decision making.
Imagine that you are the Chief Financial Officer (CFO) of a U.S.-based international manufacturing company. Propose two (2) actions that you would take in order to defend the difference in the required rate of return for your company on similar projects in an established market as compared to the same investment in an emerging market. Provide a rationale for your response.
Explanation / Answer
Answer:1
Required rate of return is the minimum return which the investor will desire in order to accept aproject. Required rate of return is determined based on large number of factors such as risk involved, risk taking capacity, market rate of return, inflation etc. Generally the weighted average cost of capital of the firm is adjusted based on the above factors in order to determine the required rate of return.In global market apart from the above factors certain other factors are also involved like currencyrisk, country risk, etc. Currency risk is the risk involved if the currency in which investment is made falls thereby reducing the return from the project. Similarly country risk is the involved due to the political environment of the country of investment.These factors impact largely on decision making as these factors increases the required rate of return for the investment proposal.
Answer:2
Required rate of return is largely influenced by the risk in the project. This means that a project with higher risk will have a higher required rate of return whereas a project with lower risk will have a lower rate of return. There are two forms of risk one is project specific risk which will remain constant irrespective of the location where the project is being carried out. Another risk is the country risk which varies from country to country. The required rate of return may be different in US and India for the same project carried on in the two countries. This is because if the investor is located in India its project in India will not be exposed to currency risk and thus the required rate of return will be lower whereas its investment in US will have higher risk as although the project risk is same the currency and country risk will increase the required rate.
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