Financial Management: Core Concepts, Third Edition

18.4 Foreign Investment Decisions

Multinational capital budgeting is a straightforward application of the NPV model with one twist: we can do the analysis in either domestic currency or foreign currency. The inputs are identical to those for any other project in that we need to know the timing and amount of all incremental cash flow and must select the appropriate discount rate for the project.

However, we should consider two important issues as we extend capital budgeting into a multinational setting. The first is the derivation of the appropriate discount rate, which must take into account different inflation rates in different countries. The second is the exchange rate, with which we are now familiar.

In terms of finding the appropriate discount ...