
CROSS-BORDER INVESTMENT DECISIONS 337
business risk, which the company has to account for in capital budgeting. The MNC has to
forecast a certain exchange rate every year and accordingly arrive at the NPV for the project.
But the exchange rates are subject to fluctuations, sometimes so violently to vitiate the entire
estimation process. The discount rate is supposed to cover the entire risk factor, and leave a
solid return for the investors.
An Indian firm wishes to invest in a U.S. project. It is estimated that the project will initially cost USD 100 million. The
firm expects to have a debt ratio of 52 percent in the project funding