Preview

Capital Budgeting for Multinationals

Powerful Essays
Open Document
Open Document
3315 Words
Grammar
Grammar
Plagiarism
Plagiarism
Writing
Writing
Score
Score
Capital Budgeting for Multinationals
CAPITAL BUDGETING FOR MULTINATIONALS
13.1 INTRODUCTION
Although the original decision to undertake an investment in a particular foreign country may be the outcome of combination of strategic, behavioural and economic considerations, choice of a specific project within a particular product-market posture calls for evaluation of its economic feasibility. For this purpose, capital budgeting exercise has to be done. A firm should deploy funds in a project if the marginal revenue obtained there from exceeds the marginal cost. For an MNC, capital budgeting involves economic analysis of the firm's direct investment opportunities. Whatever be the motive for Direct Foreign Investment (DFI), an MNC's very survival and sustainable competitive position depends on its ability to identify and choose the most profitable investment opportunity. Capital budgeting technique provides the mechanism to identify opportunities and evaluate their economic viability. This is why MNCs evaluate international projects by using capital budgeting techniques. Proper use of capital budgeting techniques can help the firm in identifying the international projects worthy of implementation from those that are not.
13.2 FUNDAMENTALS OF EVALUATING FOREIGN PROJECTS
Once a firm has compiled a list of prospective investments, it uses capital budgeting techniques to select from among them that combination of projects that maximizes the firm's value to shareholders. The theoretical framework involved in evaluation of domestic projects is the same as for foreign projects and various considerations influencing choice of a project within the country are the, same as those for projects overseas. However, there are a host of factors which are unique to foreign investments that make cross-border investment decisions complicated.
The basic steps involved in evaluation of a project are:
1. Determine net investment outlay;
2. Estimate net cash flows to be derived from the project over time, including
Continue Reading
View Writing Issues

You May Also Find These Documents Helpful

  • Powerful Essays

    Concordia Real Estate Inc Case Study: Analysis of the Investment Opportunity
    • 3248 Words
    • 13 Pages

    Concordia Real Estate Inc Case Study: Analysis of the Investment Opportunity

    The results of the analysis lend favourably towards accepting the investment project. First it is important to note that based on the after tax cost of borrowing and a risk premium of 3.75%, a discount rate of 8.89% was deemed appropriate for the project. The majority of the investment indicators used to value the project use discounted cash flows to determine the investment’s profitability. This technique allows for comparison amongst different investment opportunities available, as it provides the total return that is expected to be achieved over the project’s horizon in current dollar terms.…

    • 3248 Words
    • 13 Pages
    Powerful Essays
    Read More
  • Good Essays

    Super Project HBS
    • 882 Words
    • 4 Pages

    Super Project HBS

    To analyze the attractiveness of the investment in the Super Project, we must use the estimated cash flows calculated to derive a decision based on a particular capital budgeting technique. Within this report we have considered the Accounting Rate of Return, the Payback Period, the Internal Rate of Return (IRR) and the Net Present Value (NPV) techniques. The accounting rate of return is defined as the average after-tax profit divided by the average invested capital. The average invested capital for the Super Project is simply the average of the $200,000.00 initially required and the Total Working Funds (line 20) for each period forecasted in Exhibit 6. The average after-tax profit is simply the average of the Net Profit (line 37) for each…

    • 882 Words
    • 4 Pages
    Good Essays
    Read More
  • Powerful Essays

    jet copies
    • 2166 Words
    • 7 Pages

    jet copies

    References: Amadeo, K. What Is Being Done to Control Unemployment? Retrieved Feb 21, 2014, from About.com: http://useconomy.about.com/od/supply/f/unempl_control.htm…

    • 2166 Words
    • 7 Pages
    Powerful Essays
    Read More
  • Powerful Essays

    Capital Budgeting and Qualitative Measures.
    • 2063 Words
    • 9 Pages

    Capital Budgeting and Qualitative Measures.

    “One of the key areas of long-term decision-making that firms must tackle is that of investment - the need to commit funds by purchasing land, buildings, machinery and so on, in anticipation of being able to earn an income greater than the funds committed”. (Investment Appraisal sheet). A Capital Budgeting Process essentially defined as, “the process by which the financial manager decides whether to invest in specific capital projects or assets” (Capital Budgeting, Decision Process, Procedure, definition) is put in place within companies in order to sift through and make decisions regarding viable major investments. The various stages of the Capital Budgeting Process are (a) Forecasting investment decisions; (b) Identifying projects to meet needs; (c) Appraising the investments; (d) Selecting the best alternatives; (e) Making the expenditure; (f) Monitoring projects. (Investment Appraisal sheet). There are also various components of the process which include, the initial investment outlay, which is the initial cash outflow on the purchase of an asset less the net cash proceeds from the disposal of the replaced asset; Net cash savings or benefits or savings from operations; Terminal cash flow; and the NPV technique. (Capital Budgeting, Decision Process, Procedure, definition). Management accounting uses the Net Present Value (NPV) technique, which in simple terms practices an explicit comparison of the returns from a specific project with the relevant opportunity cost of capital, to appraise and manage investment decisions. NPV is an indicator of how much value an investment adds to the firm. (Net Present Value, 2009)…

    • 2063 Words
    • 9 Pages
    Powerful Essays
    Read More
  • Powerful Essays

    Case Write Up The Investment Detective 1
    • 1367 Words
    • 8 Pages

    Case Write Up The Investment Detective 1

    The purpose of this case is to become a capital budgeting analyst and evaluate which set of free cash flows for 8 projects will result in the most effective investment for a firm’s capital. The objective given is to rank the four best that the company should accept. The case is broken down into three separate steps including the given information about estimated cash flows (inflows & outflows), determining the appropriate discount rate, and evaluating the cash flows using the IRR (Internal Rate of Return), MIRR (Modified Internal Rate of Return), NPV (Net Present Value), and other metrics. Each project is chosen solely on the basis of the quantitative analysis. Here are some factors to consider for this case: Each project has the same initial investment of $2 million; in addition, all are believed to be of the same risk class. The managers have determined that projects 7 and 8 are mutually exclusive. The issue is that the WACC has never been officially estimated and in the past the discount rate has been assumed at 10 percent (however, certain officers have asserted the discount rate to be higher).…

    • 1367 Words
    • 8 Pages
    Powerful Essays
    Read More
  • Powerful Essays

    Multinational
    • 10987 Words
    • 44 Pages

    Multinational

    This chapter identifies additional considerations in multinational capital budgeting versus domestic capital budgeting. These considerations can either be explained briefly or illustrated with the use of an example.…

    • 10987 Words
    • 44 Pages
    Powerful Essays
    Read More
  • Powerful Essays

    Capital Budgeting
    • 2183 Words
    • 9 Pages

    Capital Budgeting

    1. Bauer Industries is an automobile manufacturer. Management is currently evaluating a proposal to build a plant that will manufacture lightweight trucks. Bauer plans to use a cost of capital of 12% to evaluate this project. Based on extensive research, it has prepared the following incremental free cash flow projections (in millions of dollars):…

    • 2183 Words
    • 9 Pages
    Powerful Essays
    Read More
  • Good Essays

    The Investment Detective
    • 439 Words
    • 2 Pages

    The Investment Detective

    This case presents the cash flows of eight unidentified investments, all of equal initial investment size. The student’s task is to rank the projects. The first objective of the case is to examine critically the principal capital-budgeting criteria. A second objective is to consider the problem that arises when net present value (NPV) and internal rate of return (IRR) disagree as to the ranking of two mutually exclusive projects. Finally, the case is a vehicle for introducing the problem created by attempting to rank projects of unequal life and the solution to that difficulty criterion.…

    • 439 Words
    • 2 Pages
    Good Essays
    Read More
  • Better Essays

    Capital Budget Recommendation
    • 1141 Words
    • 5 Pages

    Capital Budget Recommendation

    Capital investment decisions could be very complex. Several capital budget techniques available to use and numerous factors to keep in mind. For example, the time value of money may be an important factor to consider when using some of the techniques to evaluate a course of action. The payback method and unadjusted…

    • 1141 Words
    • 5 Pages
    Better Essays
    Read More
  • Powerful Essays

    Welcome to the World of Sony - Unless the Yen Keeps Rising
    • 4982 Words
    • 20 Pages

    Welcome to the World of Sony - Unless the Yen Keeps Rising

    Foreign direct investment (FDI) plays an extraordinary and growing role in global business. It can provide a firm with new markets and marketing channels, cheaper production facilities, access to new technology, products, skills and financing. For a host country or the foreign firm which receives the investment, it can provide a source of new technologies, capital, processes, products, organizational technologies and management skills, and as such can provide a strong impetus to economic development. Foreign direct investment, in its classic definition, is defined as a company from one country making a physical investment into building a factory in another country. The direct investment in buildings, machinery and equipment is in contrast with making a portfolio investment, which is considered an indirect investment. In recent years, given rapid growth and change in global investment patterns, the definition has been broadened to include the acquisition of a lasting management interest in a company or enterprise outside the investing firm’s home…

    • 4982 Words
    • 20 Pages
    Powerful Essays
    Read More
  • Satisfactory Essays

    Capital Budgeting
    • 267 Words
    • 2 Pages

    Capital Budgeting

    The process of evaluating and prioritizing capital investment opportunities is called capital budgeting. Capital budgeting relies heavily on estimates of future operation results. These estimates often involve a considerable degree of uncertainty and should be evaluated accordingly. In addition, many nonfinancial factors are taken into consideration.…

    • 267 Words
    • 2 Pages
    Satisfactory Essays
    Read More
  • Better Essays

    Evaluation Performance Evaluation Performance E
    • 1179 Words
    • 5 Pages

    Evaluation Performance Evaluation Performance E

    This paper will focus on Acme looking how to increase funding for Greenfield investment abroad, and how multinational enterprise funding can be very demanding and complicated process. Acme will be looking at the various internal sources of funding like accounts receivable, inventory reduction, line of credit, mortgages loans, well as short term loans and equity offering.…

    • 1179 Words
    • 5 Pages
    Better Essays
    Read More
  • Good Essays

    Foreign Direct Investment Confidence Index
    • 887 Words
    • 4 Pages

    Foreign Direct Investment Confidence Index

    The Foreign Direct Investment (FDI) Confidence Index influences a business's future decisions for ventures on foreign soil. Businesses use the index to compare countries for the most and potentially best prospective investment in order to profit from expansion. The FDI Index lists the top countries that are projected to be the most compelling to directly invest in fixed and variable assets in order to achieve management control (Ball, Geringer, Minor, & McNett, 2010). According to Ball, Geringer, Minor, and Mcnett (2010) in International Business; The Challenge of Global Competition, “if a nation is continuing to receive appreciable amounts of foreign investment, its investment climate must be favorable.” Through analysis of projected countries for foreign investment, a company can determine if a foreign market is favorable to expand into since other companies are continuously investing in them.…

    • 887 Words
    • 4 Pages
    Good Essays
    Read More
  • Powerful Essays

    Article of Capital Budgeting Survey
    • 2524 Words
    • 11 Pages

    Article of Capital Budgeting Survey

    Capital Budgeting Surveys: The Future is Now Richard M. Burns and Joe Walker This research is motivated by two major factors: (1) the over twenty year hiatus since the last thorough review ofthe capital budgeting survey literature, and (2) past appeals to the finance academic community by researchers to explore neglected areas ofthe capital budgeting process. In response, and using a four-stage capital budgeting process as a guide, the authors review the capital budgeting survey literature from 1984 through 2008 and find that some ofthe neglected areas have infact been directly addressed. Unfortunately, the most prevalent focus of capital budgeting surveys continues to be that ofthe selection stage.…

    • 2524 Words
    • 11 Pages
    Powerful Essays
    Read More
  • Powerful Essays

    Corporate Strategy and Foreign Direct Investment in Developing Countries Such as India
    • 2708 Words
    • 11 Pages

    Corporate Strategy and Foreign Direct Investment in Developing Countries Such as India

    When companies make decisions regarding FDI, this process require the efficient allocation of funds to investment opportunities, which often require large amounts of money that will hopefully bring greater returns to its investors. With foreign investments being far riskier than domestic investments, the effective and efficient use of funds is critical for the future performance of a multinational company. Multinational companies that engage in FDI provide a range of potential benefits that extend to the actual investors as well as the host country that is receiving the investment which are quite apparent. An example within many of these advantages include, increased profits for the industry or the firm due to lower costs of resources abroad, and increase in jobs provided in the host country. However, despite the…

    • 2708 Words
    • 11 Pages
    Powerful Essays
    Read More

Related Topics