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Unformatted text preview: Chapter Objectives 1. To describe the forces that lead company officials to focus on the possibilities of foreign investment. 2. To explain standard cash flow analysis for foreign projects. 3. To examine various capital budgeting techniques with heavy emphasis on net present value and internal rate of return. 4. To consider two techniques to adjust for foreign project estimates: the adjusted discount rate and the certainty equivalent approach. 5. To show how diversification can reduce project risk through portfolio theory. 6. To compare capital budgeting theory with capital budgeting practice. 7. To discuss the traditional sources of conflict between multinational companies and host countries. 8. To explain how companies can forecast political risk and strategically plan for it. 9. To describe specific techniques to assess political risk. 10. To evaluate the possible responses to political risk. Chapter Outline International Capital Budgeting Decisions 1 18 International Capital Budgeting Decisions I. The Foreign Investment Decision Process A. The foreign investment decision process involves the entire process of planning capital expenditures beyond one year. i. The one-year time frame is arbitrary but is widely accepted. ii. This textbook assumes that the entire foreign investment decision process consists of 11 phases. B. The first phase is the decision to search for foreign investment. i. It is not easy to pinpoint one motive for a decision to invest abroad in any particular case or to find out exactly who initiated a foreign project. The decision to search for a foreign investment is a combination of several motivating forces and activities of different persons. ii. The first phase in the foreign investment decision process is an analysis of the forces that lead some company officials to focus on the possibilities of foreign investment. iii. Considerations such as profit opportunities, tax policy, and diversification strategies are economic variables that may affect a decision to look overseas. 1. Environmental forces, organizational forces, and a drive by some high-raking officials inside a company are all other forces leading a company to look abroad. C. The second phase is an assessment of the political climate in the host country. i. There are more political risks in foreign investment. 1. To begin, at least two national governments become involved and the goals of the two countries may differ. ii. On major concern of MNCs is the possibility that the political climate of a host country may deteriorate. iii. The analyst should emphasize such factors as the host governments attitudes toward foreign investment, the desire of the host country for national rather than foreign control, and its political stability....
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- Spring '11