Week_10 Cross broader capital budgeting - Cross-Border Capital Budgeting Week 10 Chapter 14 Problem set 3 Week10-1 Learning objectives Compare the

Week_10 Cross broader capital budgeting - Cross-Border...

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Week10-1 Cross-Border Capital Budgeting Week 10 Chapter 14 Problem set 3
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Week10-2 Learning objectives Compare the capital budgeting analysis of an MNC’s subsidiary versus its parent Demonstrate how multinational capital budgeting can be applied to determine whether an international project should be implemented Show how multinational capital budgeting can be adapted to account for special situations such as alternative exchange rate scenarios or when subsidiary financing is considered Explain how the risk of international projects can be assesse
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Week10-3 Capital Budgeting Time value of money (use of present value and Future value) Identifying relevant cash-flow (iFAKemental and opportunity cost / initial, operation and terminal cash-flows) Capital budgeting criteria - Discounted (NPV, IRR and PI) and - Non-discounted (ARR and payback) (Read supplementary note on capital budgeting)
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Week10-4 Subsidiary versus Parent Perspective Subsidiary Perspective - evaluating capital project based on subsidiary operational environment subsidiary will administer the project subsidiary is a part of the parents Parent Perspective - the parent will provide most of the financing
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Week10-5 Subsidiary versus Parent Perspective Subsidiary All cash inflows and outflows in subsidiaries functional currency. Capital investment is receiving from the parents. Subsidiary can transfer profit directly or indirectly as management fees Pay local taxes Subsidiary Need to identify cash flows in parents functional currency. Parent provides the capital for foreign projects. Subsidiary can transfer profit directly or indirectly as management fees Need to pay local taxes Initial Investment In parents currency Profit Transfer In subsidiary currency Remittance tax on profit transfer Foreign exchange Market
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Week10-6 Subsidiary versus Parent Perspective The results may vary with the perspective taken because the net after-tax cash inflows to the parent can differ substantially from those to the subsidiary. Such differences can be due to: - Tax differentials What is the tax rate on remitted funds? - Restricted remittances - Excessive remittances (Profit and management fee) The parent may charge its subsidiary very high administrative fees.
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