Multinational Financial Management

Capital Budgeting for the Multinational Corporation

Nobody can really guarantee the future. The best we can do is size up the chances, calculate the risks involved, estimate our ability to deal with them, and then make our plans with confidence.

HENRY FORD II

LEARNING OBJECTIVES

• To assess the profitability of foreign investments by identifying the incremental cash flows generated by these investments
• To explain the various ways in which incremental cash flow can differ from total project cash flow
• To contrast the net present value approach using a weighted cost of capital with the adjusted present value approach for valuing foreign projects and explain when each method is most appropriate
• To compute the unlevered equity beta in order to calculate the all-equity cost of capital
• To identify the differences between foreign project and parent cash flows and describe a three-stage approach to account for these differences in a capital-budgeting analysis
• To describe the three main methods for incorporating political and economic risks into foreign investment analysis and determine the circumstances (if any) under which each of these methods is most appropriate
• To describe a two-step procedure for incorporating exchange rate changes and inflation into a foreign investment analysis
• To show how foreign project cash-flow adjustments can be carried out, especially in the case of political ...