International Corporate Finance: Value Creation with Currency Derivatives in Global Capital Markets, + Website

CHAPTER 20

International Capital Budgeting

Merchants have no country . . . the mere spot they stand on does not constitute so strong an attachment as that from which they draw their gains.

Thomas Jefferson

One of the most vital decisions firms make is the capital investment decision—selecting value-creating investment projects that will increase the current market value of the firm. As the firm expands the geographical scope of its activities, it will consider entering foreign markets, retooling foreign assembly operations, offshoring, or even acquiring foreign businesses. The primary motivation for these important decisions is undoubtedly strategic, but ultimately each “go” decision will have to be validated by a feasibility study that includes traditional financial analysis. This is a complex exercise fraught with many more unknowns. This chapter develops a framework for directly comparing contending foreign investment proposals in a way that systematically incorporates the many complicating factors that uniquely shape each project under review.

By reading this chapter you will understand:

• The foreign direct investment process within which capital budgeting is embedded.
• The differences between valuing international projects and valuing domestic ventures.
• How to identify relevant cash flows for an international project.
• Why it is crucial to value the project in the host country's local currency terms first and then in the investor's reference currency.
• The rationale for discounting ...