week 8 workshop 2 solutions.pdf - 1 BFF2341 INTERNATIONAL...

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1 BFF2341 INTERNATIONAL FINANCIAL MANAGEMENT Suggested solutions for week 8 workshop 2 questions Multinational Capital Budgeting Question 1: Why should capital budgeting for subsidiary projects be assessed from the parent’s perspective? What additional factors that normally are not relevant for a purely domestic project deserve consideration in multinational capital budgeting. ANSWER: When a parent allocates funds for a project, it should view the project’s feasibility from its own perspective. It is possible that a project could be feasible from a subsidiary’s perspective but be infeasible when considering a parent’s perspective (due to foreign withholding taxes or exchange rate changes affecting funds remitted to the parent). Some of the more obvious factors are (1) exchange rates, (2) whether currency restrictions may exist, (3) probability of a host government takeover, and (4) foreign demand for the product. Question 2: Accounting for Risk. What is the limitation of using point estimates of exchange rates in the capital budgeting analysis? List the various techniques for adjusting risk in multinational capital budgeting. Describe any advantages or disadvantages of each technique. Explain how simulation can be used in multinational capital budgeting. What can it do that other risk adjustment techniques cannot? ANSWER: Point estimates of exchange rates lead to a point estimate of a project’s NPV. It is more desirable to have a feel for a variety of outcomes (NPVs) that could occur. The risk adjusted discount rate (RADR) is easy to use but generates only a single point estimate of the NPV.
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