Chapter17_3 - Multinational Financial Management Alan...

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Multinational Financial Management Alan Shapiro 9 th Edition Power Points by Joseph F. Greco, Ph.D. California State University, Fullerton
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CHAPTER 17 Capital Budgeting for the Multinational Corporation
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BASICS OF CAPITAL BUDGETING I. BASICS OF CAPITAL BUDGETING A. Basic Criterion: Net Present Value B. Net Present Value Technique: 1. Definition The present value of future cash flows, discounted at the project’s cost of capital less the initial net cash outlay.
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BASICS OF CAPITAL BUDGETING 2. NPV Formula: where I 0 = initial cash outlay x t = net cash flow at t k = cost of capital n = investment horizon 0 1 (1 ) n t t t x NPV I k = =- + +
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BASICS OF CAPITAL BUDGETING 3. Most important property of NPV technique: -focus on cash flows with respect to shareholder wealth 4. NPV obeys value additive principle: - the NPV of a set of projects is the sum of the individual project NPV
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BASICS OF CAPITAL BUDGETING C. International Cash Flows 1. Important principle when estimating: Incremental basis: what matters is not the project’s total cash flow per period, but the incremental cash flows generated by the project.
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BASICS OF CAPITAL BUDGETING 2. Distinguish total from incremental flows to account for a. cannibalization --a new product taking sales away from the firm’s existing products. --e.g., when Honda introduced its Acura line of cars, some customers switched their purchases from the Honda Accord to new models.
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b. sales creation --is the opposite of cannibalization, in calculations of the project’s cash flows, the additional sales and associated incremental cash flows should be attributed to the project --e.g., Black and Decker, the US power tool company, significantly expanded its exports to Europe after investing in European production facilities that gave it a strong local market position in several product line
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c. opportunity cost
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This note was uploaded on 01/24/2011 for the course FINS 5516 taught by Professor A during the Three '10 term at University of New South Wales.

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Chapter17_3 - Multinational Financial Management Alan...

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