Chapter 13Multinational Capital Budgeting

There is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things.

—Niccoló Machiavelli, The Prince

In principle, there is little difference between domestic and multinational capital budgeting. From the perspective of the parent firm, project value is still the discounted present value of expected cash flows from the investment discounted at an appropriate risk-adjusted cost of capital. Projects should be undertaken only if the present value of the expected future cash flows from investment exceeds the cost of the investment.

Although the principle is the same, in practice multinational investment decisions are more complex than their domestic counterparts. First and foremost, cross-border projects usually involve one or more foreign currencies. If the international parity conditions do not hold (and they usually do not), then the project will have a different value to foreign than to domestic investors. Cross-border projects also are more likely than domestic projects to involve special circumstances or side effects including capital flow restrictions that block funds in a host country, project-specific subsidies such as tax holidays or subsidized financing provided by host governments, or project-specific penalties such as tariffs or possible asset seizures by a host government. This chapter shows how to apply the discounted ...

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