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Decisions related to the purchase and sale of goods and services, transfer of capital assets, royalty payments, borrowing and investment could be affected between the MNC and its foreign subsidiaries. Transfer pricings are used by MNC’s and its subsidiaries to minimize overall tax that the MNC has to pay. Transfer pricing tends to have a misleading effect on the capital budgeting decision, because due to transfer pricing, the value of cash flows for a project is probably going to distort the numbers. This arises because the value of cost und its incremental cash flow will be distorted which consequently leads to incorrect data being used in the capital budgeting analysis.To counterbalance any distortion and misleading impact on transfer prices on capital budgeting decisions, MNC’s have to make some modifications. One would be that organizations will need to usethe market price in the capital budgeting decisions, and the other is that any fees, royalties and appropriate fixed costs that are paid from one subsidiary to another/parent company will have to be added back in to the cash inflows.- A strategic rather than a strict financial viewpointAn MNC does not estimate an international capital project only based on financial data and financial analysis. Strategy can be a bigger factor when MNC’s are deciding on a foreign project. Many times a project with a lower financial perspective will be chosen based on such strategic reasons. Reasons, such as continuous market access, the ability to compete with local companies, the availability and accessibility of a reliable resource of raw materials, and others can compel an MNC to operate in foreign countries.Resources:
Gitman, Lawrence, J., & Zutter, Chad, J., (2015), Principles of Managerial Finance, Pearson Education, Inc. One Lake Street, Upper Saddle River, NJ 07458Investopedia, (n.d.), Foreign Exchange Risk, Investing Answers, (n.d.), Transaction Risk, -dictionary/world-markets/transaction-risk-1549Cengage, (2007), Incorporating International Tax Laws in Multinational Capital Budgeting,