CHAPTER 7

International Capital Budgeting

The theory of overseas investment decisions is generally based on the standard capital budgeting concept, which involves discounting a project’s expected operating cash flows back to the present using a cost of capital that reflects the risk. The investment’s net present value (NPV) is the present value of the expected cash flows minus the outlay necessary to undertake the investment. If the NPV is positive, the investment should be accepted, because the intrinsic wealth of the firm’s existing shareholders would rise. If the NPV is negative, the investment should be rejected, because intrinsic wealth of the firm’s existing shareholders would drop. This chapter assumes that you already understand the basics ...

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