Identifying, evaluating and selecting foreign projects. Cash flow analysis is most important.
What is the purpose of Capital Budgeting?
Maximize shareholder wealth.
What is the general decision criterion for capital budgeting projects?
Cash flows and NPV.
How do firms create/find net present value in a competitive environment?
Sensitivty explosion NPV.
How is cash flow different from profit?
Cash flow is expected values not actual.
What special value opportunities may arise in international projects?
Foreign labor, revenue enhancement, diversification of cash flows, a counter threat of adverse regulation, and create flexibility for future actions. ( Decrease costs and raise revenues)
What special cash flow estimate and risk consideration factors arise in international projects?
Organizational form, currency translation( possible increase volatility), country risk, taxes, discount rate, real options
What are the basic inputs into capital budgeting analyses?
Revenues, expenses( direct overhead), depreciation, tax rate, ^NWC, ^FA
How can future exchange rates be estimated?
Constant rate assumption, conservative is foreign currency is weak. Relative PPP
How is risk incorporated into capital budgeting analyses?
One way to evaluate currency risk in the context of capital budgeting is to assess break-even currency values.
How is risk incorporated into a discount rate?
Recognizing that country risk increases volatility of a firm’s cash flows, the first approach makes adjustments to the discount rate. The higher the level of country risk, the higher is the discount rate. It is better to adjust cash flows than it it is to adjust the discount rate
What is a sensitivity or scenario analysis? What is its purpose?
Identify risks in foreign and make a better decision.
How is inflation incorporated into capital budgeting analysis?
Inflation affects cash flow estimates and discount rates(fisher effect)
What is the relationship between domestic cost of capital and foreign cost of capital?
If there is parity the difference is based on currency appreciation or depreciation. If not, one cost of capital will be cheaper.