CH 13 & 14

CH 13 & 14 - 182 Chapter 13 Okapier In the...

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Unformatted text preview: 182 Chapter 13 Okapier In the following exercise, place a letter from the right column with the correct number in the left column. 1. Direct Foreign . lower average cost per unit resulting from increased Investment production 2. Economies of Scale . investment in real assets (such as land, building, or even existin lants in forei 11 countries 1) Expected financing rate of a portfolio of two currencies rp = wArA +wBrJg 2) Variance of a two-currency portfolio’s effective financing rate 2 __ 2 2 2 2 0'? — wAaA + 141303 + 2wAwBaA03(CORRAB) Definitional Problems 1. The investment in real assets (such as land, buildings, or even existing plants) is referred to as 2. Even if an MNC’s growth is limited at home, it may be able to attract in foreign countries. 3. The realization of lower average cost per unit resulting from increased production is known as 4. Due to the , more homogenous products can be sold in all European countries. This is because it removed trade barriers between those countries. 5. An MNC will often attempt to set up production in locations where the are cheap. 6. When a foreign currency is perceived by a firm to be , the firm may consider direct foreign investment in that country, as the initial outlay should be relatively low. Direct Foreign Investment 183 7. Several Eastern European countries that became part of the in 2004 were targeted for new DFI by MNCS that wanted to reduce manufacturing costs. 8. Since economies of countries do not move perfectly in tandem over time, net cash flow from sales of products across countries should be more than comparable sales if the products were sold in a single country. 9. More than one-half of all DFI by US. firms is in countries. 10. When economic conditions of two countries are not highly , then a firm may reduce its risk by diversifying its business in both countries rather than concentrating in just one. 11. As more projects are initially added to a portfolio ofprojects, the portfolio variance should . However, after some point, the average reduction in variance becomes 12. The term refers to a minimum risk for a given expected return. 13. An MNC is better off if the efficient portfolio fi'ontier is further to the , since this reflects less risk. 14. MNCs can probably achieve more desirable risk-return characteristics from their project portfolio if they sufficiently diversify among products and markets. 15. DFI may be perceived as a remedy of national problems by host governments. For example, DFI may provide needed or 16. The ability of a host government to attract DFI is dependent on the country’s markets and resources, as well as government and 17. If a foreign subsidiary has a use for funds that would be of more value than the parent’s use, the subsidiary should those funds. 18. The efficient frontier of international project portfolios may be further to the left than the efficient frontier of purely domestic portfolio because of higher benefits. 19. barriers are implicit barriers to DFI in some countries that refer to the procedure and documentation requirements involved. 20. To limit or prevent international acquisitions, some governments may restrict Answers to Definitional Problems 1. direct foreign investment (DFI) 6. undervalued 2. demand 7. European Union 3. economies of scale 8. stable 4.. Single European Act 9. European 5. factors of production 10. correlated 184 Chapter 13 11. decrease; negligible 16. regulations; incentives 12. efficiency 17. retain 13. left 18. diversification 14. geographic 19. “red tape” 15. employment; technology 20. foreign ownership I T rue/F alse Problems a t i gt @vfl Direct foreign investment (DFI) represents investment in real assets (such as land, buildings, or even existing plants) in foreign countries. 2. Although direct foreign investment is sometimes conducted, benefits are rarely realized. 3. Many developing countries, such as Argentina, Chile, and Mexico, have been perceived as the most attractive sources of new demand. 4. The term economies of scale refers to a lower total production cost as production is increased. 5. An MNC may enter a foreign market because rates of return there are significantly higher than those available at home. 6. MNCs often attempt to set up production in locations where land and labor are expensive, because expensive factors of production indicate high demand. 7. Due to market imperfections, the cost of factors of production (such as labor) may differ substantially across countries. 8. Both the use of foreign raw materials and the use of foreign technology may motivate an MNC to establish a subsidiary in a foreign country. 9. If a particular firm possesses an advanced technology that has been exploited at home, it is probably not a good idea to establish a subsidiary overseas because the technology will probably already have been exploited there. lfb‘ifffhé” shifts of DFI to low-cost Eastern European countries will make manufacturing more efficient and competitive, but the tradeoff is thousands of jobs lost in Western Europe. 11. There are various reasons an MNC may decide to establish a foreign subsidiary. However, it must realize that economics of countries typically move in tandem over time. Thus, the volatility of cash flows will probably not be reduced because of direct foreign investment. 12. The optimal method for a firm to penetrate a foreign market is partially dependent on the characteristics of the market. 13, 51" We reasons for the increased focus of DFI in Europe are the Single European Act and the “if” addition of several Eastern European countries to the European Union in 2004. 14. In assessing the risk of an individual project, the expected correlation of the new project’s returns with those of the prevailing business must not be considered. Direct Foreign Investment N H e s 185 . If a new project is located in a foreign country rather than at home, unless the project’s returns are perfectly positively correlated with those of the prevailing business of the firm, the variability of returns is reduced. . As more projects are added to a portfolio of projects, the variability of the portfolio is reduced. This reduction is greater the smaller the number of projects in the portfolio. The term “efficient” refers to the positive relationship between risk and returns. That is, the higher the risk, the higher the return. Because of greater diversification benefits, the efficient portfolio frontier of multinational projects probably lies to the left of the efficient portfolio frontier for domestic projects. . MNCs can probably achieve more desirable risk-return characteristics from their project portfolios if they sufficiently diversify among products and geographical markets. Once a decision to establish a foreign subsidiary has been made, it is irreversible. Therefore, no periodic monitoring of the project is necessary. . Foreign governments may subsidize direct foreign investment in their country if they believe DFI will provide needed employment and/or technology. . Some types of direct foreign investment will be more attractive to some governments than others. . MNCs wants to avoid a situation in which they pursue DFI under a government that is likely to be removed after the DFI occurs. The local firms of some industries in particular countries have substantial influence on the government and will likely use their influence to encourage competition from MNCs that attempt DFI. Answers to T rue/F alse Problems HPWFPP?‘ Hui—woo PI‘P' ' T 13. T F 14. F T 15. T F 16. T T 17. F F 18. T T 19. T T 20. F F 21. T T 22. T F 23. T T 24. F 186 Chapter 13 Multiple Choice Problems gt 1. Direct foreign investment is commonly considered by MNCs because it allows the MNC to at»! Attract new sources of demand. b. Enter profitable markets. c. React to exchange rate movements. _ d. React to trade restrictions. i, ' e All of the above 2 I is not a revenue-related motiVe for direct foreign investment (DFI). Attracting new sources of demand b. Fully benefiting from economies of scale c Exploiting monopolistic advantages V“ d Reacting to trade restrictions 6 Diversifying internationally 3 is not a cost~related motive for direct foreign investment (DFI). Using foreign factors of production ’0. Using foreign raw materials c Using foreign technology d Reacting to trade restrictions e Fully benefiting from economies of scale @ 4. I irect foreign investment by a US. firm is commonly motivated by . . Special subsidies by the US. government b. Guarantees on any debt of the firm provided by the US. government c. Ch r f r reduction '“ None of the above ‘_ 5.; is not a country mentioned in your text viewed as an attractive source of if new demand. a. Argm . "is. Great Britain 0. Mexico_ d. China e. None of the above 6. When a foreign currency is perceived by a firm to be , the firm will probably ) direct foreign investment in that country. . 99W Undervalued; not consider . (Mng a and c b and c a: ‘ 99-957 Direct Foreign investment 187 i 7. iWhich of the following is not an advantage associated with international diversification? [a \ a.Net cash flows from sales 6f products across countries should be more stable than comparable sales if the products were sold in a single country. b. The ppssibflfiy ofa liquidity deficiency/"is less likely than without international diversificationTeverythifigfielsEbeing equal. c- The firm mar saint slower. ligaments}. as shareholders», and, sissiitorspstcsirs the soles risk to be lower._ " " With international diversification, the MNC is better able to react to trade restrictions \ imposed by a single government than it is without international diversification. 8. [According to your text, the best means of using direct foreign investment to attract new - \j‘ sources of demand is probably to H a. Establish a subsidiary or acquire a Competitor in a new market. @‘ b. Establish'a subsidiary/iii "a'ma'rk'et 3in'w1ii2'ihm't’6ii‘gher trade restrictions will adversely affect the firmfs export volume. c. Establish subsidiaries in markets whose business cycles differ from those where existing subsidiaries are based. 6.. Establish an additional subsidiary in an existing market than can sell products produced elsewhere. 9. J‘The best means of using direct foreign investment (DFI) to fully benefit from economies of V ‘ scale is probably to " " ' ' ' ' a. Acquire a competitor that has controlled its local market. I b. Establish a subsidiary in a new market than can sell products produced elsewhere, this allows for increased production and-possibly greater production efficiency." '7 7 c. Establish a subsidiary inma market that has relatively'low'costs bi labor and land; sell the finished product t countries where the cost of production is higher. (1. Establish a subsidiary in a market in which raw materials are cheap and accessible; sell the finished product to countries in which the raw materials are more expensive. 10. "he best means of usingwcfirect foreign investment (DFI) to fully benefit from cheap foreign t. factors of production is probably to I I I _ __ a. Acquire a competitor that has controlled its local market. b. Establish a subsidiary in a new market than can sell products produced elsewhere; this allows for increased production and possibly greater production efficiency. 0. Establish a subsidiary in amarket‘that has relativelylgwcostswgflabor andland; sell the finiShesrzmdsct.t,ssfifiséwhsre thee .t.o.f.pm£lllct.. _n_ is higher. d. Establish a subsidiary in a market in which raw materials are cheap and accessible; sell the finished product to countries in which the raw materials are more expensive. Diiect Foreign Investment 189 SCIWA \\ w l? 16. In general, the risk reduction achieved by adding projects to a portfolio is _ the I the number of projects in the portfolio prior to the addition. fig Greater; greater ' " b. Smaller; greater 0 Greater; smaller (1. Smaller; smaller 6 b and c .. :T r j 17.5 The . it. the correlation in project returns is over time, the lift” ‘5’ i) will be the i "my project portfolio risk as measured by the portfolio variance. Lower; . .Jm“”"“ a. b. Higher; lower c d Lower; higher None of the above Q/ 18. ,-‘Which of the following is not true,"regarding host government attitudes towards direct foreign 4“ investment (DFI)? I I a. Host governments may offer incentives to MNCs in the form of subsidies in certain circumstances. b. Host governments generally perceive DFi as a remedy for their national problems. c. The ability of a host government to attract DFI is dependent on the country’s markets and resources. d. Some types of DFI will be more attractive to some governments than to others. e. All of the above are true at” There is exactly one point on the efficient frontier that is optimal for every MNC, regardless of its degree of risk aversion. b. The efficient frontier for international projects will probably lie to the left of the efficient frontier for domestic projects. c. Each point on the efficient frontier represents a portfolio of projects as opposed to an individual project. (:1. a and c are false c. All of the above are true d} 19. ich of the following is not true regarding the efficient frontier considered by MNCS? . l 41 fig 20. general, much of the direct foreign investment (DFI) by US. firms is in a. ln’Canada b. Asia c. Mexico e. Chile ’4 W 21. Which of the following is’n‘lsrti: barrier to DFI? " a. __Barfiers that restrict ownersh bi", “Redtap'eflbarriers l c. Industry barriers d. Politicalinstability 7 c. All of the above are barriers 190 Chapter 13 Answers to Multiple Choice Problems (4Zumffifi6fi1m2+m4xmumxflmsa wwp/ ~9¢H9w§wwr OUWQQU‘OQUO 0. 1 .)X{ (mupfiam$=u% l¥b wmymmadm Multinational Capital Budgeting 195 C/\\ueker\ : Key Terms Matching l In the following exercise, place a letter from the right column with the correct number in the left column. a. a computer—based analysis that includes the generation of a probability distribution for NPV based on a range of possible values for one or more input variables b. a tax provision allowing corporations to use negative earnings in one year to offset earnings in previous years c. a tax provision allowing corporations to use negative earnings in one year to offset earnings in subsequent years additional business opportunities contained in a project which may enhance the value of a project e. use of what-if scenarios for values of input variables in' capital budgeting analysis; the objective is to determine how sensitive NPV is to alternative values of the in ut variables Net Operating Loss ‘ Carryback 2. Net Operating Loss Carryforward Real Options Summary of Formulas l) Break-even salvage value SVn = [10— CF’ r](1 + k)” M (1 + k) 2) Net present value NPV = —10+ CE + SV” M (1+ k)’ (1+ k)" Deflnitional Problems 1. It could be argued that capital budgeting for a multinational project should be conducted from the viewpoint of the , since it will be responsible for administering the project. 2. Critics may argue that capital budgeting for a multination project should be conducted from the viewpoint of the , especially if it provides some of the project financing. 196 Chapter 14 3. If the parent’s government imposes a high tax rate on remitted funds, a project may be feasible from the point of view, but not from the point of view. 4. If a host government restricts the remittances from a foreign subsidiary, a possible solution is to let the subsidiary obtain partial for the project. 5. If the parent charges the subsidiary administrative fees, the earnings from the project will appear to the parent and to the subsidiary. 6. If a multinational project is assessed from the subsidiary’s perspective, forecasted are irrelevant for project assessment. 7. A perspective is appropriate in attempting to determine whether a project will enhance the firm’s value. 8. Any project that can create a net present value for the parent should enhance shareholder weaith and, consequently, be accepted. 9. The initial investment in a project may include not only whatever is necessary to start the project but also additional funds in the form of to support the cash cycle of the project. 10. To forecast consumer demand for a project, one should begin with a forecast of 11. To forecast selling price, variable costs, and fixed costs, consideration must be given to expected in the foreign country. 12. Once the relevant cash flows of a proposed project are estimated, they can be discounted at the project’s , which may differ from the MNC’s cost of capital because of that particular project’s risk. 13. It is extremely important that MNCs incorporate the degree of for any input that is used in the project evaluation (capital budgeting). Otherwise, MNCs may take on a project by mistake. 14. A commonly used capital budgeting technique is to estimate the cash flows and salvage value to be received by the parent and compute the of the project. 15. If a project’s NPV is positive, the project should probably be ; if it is negative, the project should probably be 16. From the parent’s point of view, of the foreign currency w0uld be favorable when assessing a foreign project. 17. The exchange rates of highly inflated countries tend to over time. Thus, even if subsidiary earnings are inflated, they will be deflated when converted into the parent’s home currency. 18. Unlike domestic capital budgeting issues, foreign should probably be explicitly considered in the cash flow analysis. Multinational Capital Budgeting 197 19. In general, increased investment by the parent relative to the subsidiary causes exchange rate exposure to the parent because the cash flows remitted to the parent will be larger. 20. Projects financed entirely with retained earnings of the foreign subsidiary could be assessed by regarding the subsidiary’s investment as a(n) , since the funds could be remitted to the parent rather than invested in the foreign project. 21. Blocked funds may penalize a project if the return on the resulting forced reinvestment in the foreign country is than the required rate of return on the project. 22. The of an MNC’s project typically has a significant impact on the project’s NPV. 23. Some foreign projects may have a impact on prevailing cash flows. For example, creation of a foreign subsidiary may result in increased sales by the parent to that subsidiary. 24. Some capital budgeting projects contain , in that they may allow for additional business opportunities. 25. The three common methods to adjust the capital budgeting process for risk are use of a discount rate, analysis, and 26. The objective of is to determine how sensitive the NPV is to alternative values of the input variables. 27. In a computer-conducted , the computer randomly picks values for the input variables and computes an NPV. This process is repeated maybe 100 times to generate a distribution of NPVS for a project. 28. An international may be preferable to the establishment of a new subsidiary because the firm can immediately expand its international business and benefit from existing customer relationships. 29. Foreign projects that have been implemented must be assessed from time to time to determine whether they should be continued or 30. When negative earnings from operations are allowed to be carried back or forward to offset earnings in other years, this is known as and , respectively. 31. To minimize taxes, MNCs may attempt to use . For example, a subsidiary located in a high tax rate country may purchase supplies from a subsidiary located in a low tax rate country at relatively high prices to shift income from the former to the latter. Answers to Definitional Problems 1. subsidiary 3. subsidiary’s; parent’s 2. parent 4. financing 198 Chapter 14 5. high; low 19. more 6. exchange rates 20. opportunity cost 7. parent’s 21. less 8. positive 277 22. salvage value 9. working capital ' 23. favora e \ 10. market share 24. real options 1’ 11. inflation 25. risk-adjusted; sensitivity; simulation 12. required rate of return 26. sensitivity analysis 13. uncertainty 27. simulation 14. net present value (NPV) 28. acquisition 15. accepted; rejected 29. divested 16. appreciation 30. net operating loss carryback; 17. depreciate carryforward 18. interest expenses 31. transfer pricing T rue/F alse Problems I. In conducting a multinational capital budgeting analysis, the subsidiary’s perspective should always be used. W 2. Sometimes, a multinational project may appear feasible from the subsidiary’s perspective but not fiom the parent’s perspective and vice versa. 3. If the parent’s government imposes a relatively high tax rate on remitted earnings and if the host government restricts remittances from the subsidiary to the parent, a multinational project will probably appear feasible from the parent’s point of view but not from the subsidiary’s point of view. y 4. The feasibility of a multinational project from the parent's perspective is dependent not on the subsidiary cash flows but on the cash flows that it ultimately receives. 5. Assuming that a subsidiary is wholly owned, a subsidiary’s perspective is appropriate in attempting to determine whether a project will enhance the firm’s value. 6. The initial investment in a foreign project may include not only whatever is necessary to start i the project but also additional funds, such as working capital, to support the project over time. i 7. A good starting place to forecast demand for a project is to project the expected market share. 8. When forecasting the price at which products can be sold in the foreign country, domestic prices should be used as the most likely estimate. 9. Price, variable costs, and fixed costs of a foreign project are all sensitive to the inflation rate in the foreign country. 9:? 10. T e alvage value of a foreign project may depend on the attitude of the host government ‘ ards the project. 11. Because funds rest with the subsidiary and are therefore a part of the MNC, fund—transfer restrictions are irrelevant in multinational capital budgeting. Multinational Capital Budgeting 17. 18. 27. 28. 199 . Because most hedging techniques are used to cover short—term positions, and because future cash flows of a long—term foreign project are uncertain, MNCs may decide not to hedge the projected foreign currency net cash flows. . The required rate of return used to discount the relevant cash flows from a foreign project may differ from the MNC’s cost of capital because of that particular project’s risk. . If a parent’s perspective is used in analyzing a multinational project, the relevant cash flows are the dollars ultimately received by the parent as a result of the project; the relevant initial outlay is the investment by the parent. In multinational capital budgeting, depreciation is treated as a cash outflow. . A commonly used capital budgeting technique for domestic and multinational projects is the net present value (NPV) approach. When a project’s NPV is positive, the project should probably be accepted; when it is negative, the firm is indifferent between accepting and rejecting the project. No matter what the probability distribution of future exchange rates is, as long as one out of several scenarios results in a negative net present value (NPV), a project should not be accepted. . If a U.S.-based MNC pursues a capital budgeting project in a country where the local currency is tied to the dollar, it may be useful to reestimate the project’s NPV based on a likely devaluation scenario. . The exchange rates of highly inflated countries tend to appreciate over time. . Because inflation is only one of many factors that influence exchange rates, there is no guarantee that a currency will depreciate when the local inflation rate is relatively high. . if partial financing is provided by the foreign subsidiary, including foreign interest payments in the cash flow analysis may avoid overstatement of the estimated foreign cash flows. . The higher the initial investment by the parent, the lower its exchange rate exposure. . If a foreign project is financed with a subsidiary’s retained earnings, the subsidiary's investment could be viewed as an opportunity cost, since the fimds could be remitted to the parent rather than invested in the foreign project. . Blocked fiinds always penalize a foreign project. . MNCs may want to compute several NPVs based on several possible salvage values, because the salvage value generally has a significant impact on a project’s NPV. Unlike domestic projects, multinational projects rarely have an impact on existing cash flows of the MNC. Since incentives offered by host country governments could only increase the net present value of the project, they do not have to be considered in the capital budgeting analysis. 200 Chapter 14 Three common methods to incorporate an adjustment for risk into the capital budgeting \ analysis are the use of risk-adjusted discount rates, sensitivity analysis, and simulation. 33‘ 30. The greater the uncertainty about a project’s forecasted cash flows, the larger should be the ‘- discount rate applied to cash flows, other things being equal. 5? 31. The objective of sensitivity analysis is to determine how sensitive the NPV is to alternative ' values of the input variables. 32 irnulation can be used for a variety of tasks. However, its drawback is that it can only handle ne input variable at a time. 33. If a net present value (NPV) is positive, this means that the present value of future cash flows will exceed the initial outlay. Answers to True/False Problems 1. F 18. F 2. T 19. T 3. F 20. F 4. T 21. T 5. F 22. T 6. T 23. F 7. T 24. T 8. F 25. F 9. T 26. T 10. T 27. F 11. F 28. F 12. T 29. T 13. T 30. T 14. T 31. T 15. F 32. F 16. T 33. T 17. F Multiple Choice Problems .,-t=-.-....‘ 1. // Which of the following isrfiggfiiregarding multinational capital budgeting? g; The capital budgeting analysis should always bé'bbiidfiEfEdr’Mfior—n the subsidiary’s perspective, since it will be responsible for administering the project. b. If the parent is financing the project, then it should probably be evaluating the project from its point of view. 0. The feasibility of a project can vary with the perSpective because the after-tax net cash flows to the parent are not necessarily equal to the after—tax net cash flows of the subsidiary. d. All of the above are true Multinational Capital Budgeting 201 25 WW Li'k’ can cause the parent’s after-tax cash flows to differ from the subsidiary’s afterwtax cash flows. 3. The number of units sold by the subsidiary b. The subsidiary’s earnings before income and taxes (EBIT) c. The tax rate the subsidiary is subject to in the host country d. Withholding taxes imposed by the host government U , ,_ /"““““x.l %:Ji«r"Which of the following is fit a faggthat can cause the parent’s after—tax net cash flows to differ from the after—tax net cast flows of the subsidiary per se? r” _ iii/Withholding taxes I w" b ocked funds c.‘ The earnings before interest and taxes (EBIT) of the subsidiary d. All of the above can cause net after-tax cash flows to differ . fl Hump-” .» " enhance a. Subsidiary earnings b. subsidiary value c. . C earnings same value e. None of the above 4. A parent’s perspegtjyeaiipropriate in attempting to determine whether a project will .13; _ f y . é! iv: is an input required for a multinational capital budgeting analysis, given that it is conducted from the parent’s viewpoint. a; yr" Salvage value bV""Price per unit sold cL/ Initial investment Consumer demand e. All of the above are inputs required for capital budgeting analysis 163,4 Which of the following isaninpht required for a maultinational capital budgeting analysis, given that it is conducted Orrithe parent’s viewpoint?£ arVFfih -transfer restrictions l} b. - ojeet'lifetime c, laws Subsidiary’s management philosophy I e. Exchange rates mfg/Forecasts of price, variable costs, and fixed costs ver a project’s lifetime must all take into “" consideration the future level of expected E in the host country. a. Currency appreciation bi, ’Tflflation c. Real interest rates (1. Government turnover 202 Chapter 14 \l . . ". / . . . . . 13,," Which of the @110me regarding the inputs of a multlnational capital budgeting fl, anal ' 9 ysrs. Fixed costs are not nonnallyasensitive, to“ changes infidernand. The salvage Value cafi‘aimost always be estimatedwith' perfect accuracy. Forecasting demand in a foreign country is relatively simple due to the abundance of historical data. Variable costs over the lifetime of the project generally remain constant and can easily be ‘ estimated. a. "bs. \c. a . _ Exchange rates for purposes of multinational capital budgeting W/ a . Are’very difficult to forecast. b.\“"Can be easily hedged with currency swaps. c. Are unimportant, as they do not affect the cash flows of the multinational project. (1. All of the above £91 A U.S.-based MNC has just established a subsidiary in Algeria. Shortly after the plant was ' built, the MNC determines that its exchange rate forecasts, which had previously indicated a slight appreciation in the Algerian dinar (DZD), were probably false. Instead of a slight appreciation, the MNC now expects that the dinar will depreciate substantially due to political turmoil in Algeria. This new development would likely cause the MNC to its estimate of the previously computed net present value. a. Lower b. Increase c. Lower, but not necessarily if the MNC invests enough in Algeria to offset the decrease in NPV (1. Increase, but not necessarily if the MNC reduces its investment in Algeria by an offsetting amount e. None of the above T he following information refers to questions 11 through 13. Assume that Baps Corporation is considering the establishment of a subsidiary in Norway. The initial investment required by the parent is $5,000,000. If the project is undertaken, Baps would terminate the project after four ears. Bapst’ca'thal is 13%, and the project is of the same risk as Baps’ existingpfbj ects. All cashfimfierEEd_fforrimthemproject will be remittedng parent at the endofeagh year. Listed below are the estimated cash flows the Norwegian sufiidifiwm-generatebver the project’s lifetime in Norwegian kroner 01010: Year 4 NOK20,000,000 Year 3 NOK17,000,000 Year 2 NOK15,000,000 Year 1 NOK10,000,000 Thecurrent exchange rate of the anvpgiaakronsrfi $9,.1.3,§...Baps’ exchange rate forecast for the Norwe—Qan‘h‘ofier—E‘Eflhemproject’s lifetime is listed below: Year 1 Year 2 Year 3 Year 4 $0.13 $0.14 $0.12 $0.15 Circa. slant"? ‘1‘ with ~- state W .. ""1173? “a a i"barggci/gig-7.57%xwkls7fljglfiw- {lpjwpygiw A: ~ I, . , a " ‘ E1» in, we, sit—get; s 1,. in" “5/ .z ‘i‘ Multinational Capital Budgeting 203 11. What is the net present value of the Norwegian project? w~$803,848 ' bl 303,848 1,048,828 d. None of the above 12. Baps believes that NOK8,000,000 of the cash flow in year 4 is a fair estimate of the project’s salvage value, sg'that theflgashflgw‘inuyefli1091512900900 without the salvagevalue. However, Baps realizes that the salvage value may be different fro 0K8,000,000 and wishes to determine the break-even salvage value, which is $ é a. 510,088.04 ,. .l- V b. 1,200,000 l 31775123 6. 1,710,088 (1. 1,040,000 ‘e/i’None of the above 13. Baps is also uncertain regarding the cost of capital. Recently, Norway has been involved in some political turmoil. What is the net present value (NPV) of this project if a 16% cost of capital is used instead of 13%? a. $17,602.62 b. $8,000,000 0. $1 48,829 d 45,147 14 f the NPV of a project is , the project should probably be g . . ' Positive; accepted b. Positive; rejected 0. Negative; accepted d. Ne ative; r ' Wand (1 \1’5/ is not a method of incorporating an adjustment for risk into the capital budgeting analysis. )0 Discriminant analysis ‘ b. 'sk-adjusted discount rate 0'.“ , ensitivity analysis d/ZSimulation ,1 Mich of the following is not true regarding simulation? [a a. It can be used to generate a probability distribution of NPVs. " b. It generates a probability distribution of NPVs by randomly drawing values for the input variable(s). c It can only be used forone variable at a time. d. It can be used to develop probability distributions of all variables with uncertain future values. 204 ‘ r” «‘ Chapter 14 ,. y“ 17. Petrus Company has a unique opportunity to invest in a two-year project in Australia. The project is expected to generate 1,000,000 Australian dollars (AS) in the first year and ' r 2,000,000 Australian dollars in the second. Petrus would have to invest $1,500,000 in the project. Petrus’ has determined that the cost of capital for similar projects is 14%. What is the net present value of this project if the spot rate of the Australian dollar for the two years is forecasted to be $0.55 and $0.60, respectively? a. $2,905,317 use-$94,183 c. $916,128 (1. None of the above 18fiUnlike domestic capital budgetg3 g project, and especially if a foreign subsidiary partially finances a foreign project, should probably be explicitly included in the cash flows analysis. a. Inflation adjustments b. Salvage values c. Tax savings from depreciation durnterest payments 1:9.fthich of the following is not a factor that should be considered in multinational capital , V budgeting? »- a, ,/Blocked funds bl! fExchange rate fluctuations / Inflation c2 , r dljFinancing arrangements 6. All of the above should be considered Zg'jffrom the subsidiary’s viewpoint, of the cash flow currency would be t; k2," Appreciation; unfavorable Depreciation; favorable c. a nd b if one of the above Alfi/Which of the following js-ript trite regarding inflation in multinational capital budgeting? as For less developed countriesTit would be very difficult to accurately forecast inflation for M/ U long—lived projects. " bL/‘Both costs and revenues are affected by inflation. ,c. If the foreign project involves importing partially manufactured components and selling the I“ finished product locally, the local economy's inflation will most likely have a stronger impact on costs than on revenues. d. All of the above are true 22,6i The .' "”" the parent’s investment in a foreign project, the the exchangirate exposure of the parent, everything else being equal. Greater; lower Lower; higher . Greater; greater 3 and b 9-957?” Multinational Capital Budgeting 205 if, Which of the following is/fibt a”characteristics of a country to be considered within an MNC’s international tax assessm‘initW Corporate income taxes Withholding taxes Provisions for carrybacks and carryforwards Tax treaties All of the above are characteristics to be considered EDP-ng 24/Kimzu Corporation, a Japan-based MNC, has subsidiaries in Egypt and in the United States, Currently, Kimzu pays 50% in taxes on the income generated by the Egyptian subsidiary and 34% in taxes on the income generated by the U.S. subsidiary. If Kimzu decided to use tr/ansfer pricing to reduce its total tax liability, it could a. )hstruet the Egyptian subsidiary to sell supplies to the U.S. subsidiary for excessively high prices. b. Instruct the U.S. subsidiary to sell supplies to the Egyptian subsidiary for excessively high prices. c. Instruct the Egyptian subsidiary to sell supplies to the U.S. subsidiary for very low prices. d. Instruct the U.S. subsidiary to sell supplies to the Egyptian subsidiary for very low prices. 25.jiuike income tax treaties, '5 help to avoid double taxation and stimulate direct “j foreign investment. r a. Withholding taxes "j b. Tax treaties c. ng’fiedits d. Carryforwards Answers to Multiple Choice Problems l. a 6. d 2. d 7. b 3. c 8. a 4. d 9. a 5. e 10. a 11. 0 Year 0 Year 1 Year 2 Year 3 Year 4 Cash flow to parent -$5,000,000 $1,300,000 $2,100,000 $2,040,000 $3,000,000 PV ofparent cash flow 1,150,442 1,644,608 1,413,822 1,839,956 Cumulative NPV -3,849,558 ~2,204,950 -791,128 1,048,828 12. e Even if there is no salvage value, the NPV would still be positive, as shown below. Consequently, there is no breakeven salvage value. Year 0 Year 1 Year 2 Year 3 Year 4 Cash flow to parent —$5,000,000 $1,300,000 $2,100,000 $2,040,000 $l,800,000 PV of parent cash flow 1,150,442 1,644,608 1,413,822 1,103,974 Cumulative NPV "3,849,558 -2,204,950 -791,128 312,846 206 13. 6 Year 0 Year 1 Year 2 Cash flow to parent -$5,000,000 $1,300,000 $2,100,000 PV of parent cash flow 1,120,690 1,560,642 Cumuiative NPV 3,879,310 -2,318,668 14. e 16. c 15. a 17. b Year 0 Year 1 Cash flow to parent -$1,500,000 $550,000 PV of parent cash flow 482,456 Cumulative NPV —1,017,544 18. d 22. c 19. e 23. e 20. d 24. a 21. c 25. 0 Year 3 $2,040,000 1,306,942 -1,01 1,726 Year 2 $1,200,000 923,361 -94,183 Chapter 14 Year 4 $3,000,000 1,656,873 645,147 ...
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This note was uploaded on 02/26/2012 for the course FIN 308 taught by Professor Ratner during the Fall '11 term at Rider.

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CH 13 & 14 - 182 Chapter 13 Okapier In the...

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