Multinational Capital Budgeting(or parts of chapter 16).ppt

Agenda Multinational capital budgeting. Project vs. parent capital budgeting? Adjust capital budgeting analysis of foreign project for risk. Case study: evaluate a greenfield foreign project Real option analysis vs. DCF analysis. Multinational Capital Budgeting Analysis of cash in- out- flows associated w/ prospective long-term investment projects. Follows same steps as domestic budgeting: Identify initial capital invested at risk. Estimate cash flows over time (including terminal value/ salvage value). Identify appropriate discount rate for PV. Apply traditional NPV or IRR analysis. Capital Budgeting for foreign projects Parent cash flows must be distinguished from project’s. Parent cash flows often depend on form of financing = cannot separate operating financing cash flows. Stand alone subsidiary cash-flow can be worth, but add no value overall. Non-financial payments can generate cash flows to parent, e.g. licensing fees. Need to evaluate political risk, forex risk differing inflation rates. Segmented national capital markets create financial gain /costs. Host government subsidies complicates WACC computation. Project vs. Parent Valuation? Most firms evaluate foreign projects from both parent project viewpoints. Rule of thumb: parent valuation shall have priority. MNE shall invest only if it can earn a risk-adjusted return greater than local competitors. Project valuation provides closer approximation of effect on consolidated EPS US firms consolidate subsidiaries w/ 50%+ ownership/ If ownership b/n 20% 49% (I.e. affiliate) = consolidate on pro-rate basis. Subsidiaries w/ 20% ownership considered unconsolidated investment. Case Study: Cemex in Indonesia Cementos Mexicanos (Cemex) considers greenfield investment in Indonesia plant (Cemex Indonesia) Presence in Southeast Asia. Strong prospects for infrastructure growth. Benefit from depreciation of Indonesian Rupiah (RP) Cemex functional currency: US$. Time to build: 1 year Inflation rates: 30