Question

2a. How does forecasting cash flows for a multinational project differ from forecasting cash flows for a US based project? b. Describe one way the required return for the project located in a foreign country can be determined if the required return for a similar project located in the US is known. c. When determining the required return for a capital budgeting project located in a foreign country, why does it matter whether the capital market in that foreign country is integrated with the world market or is segmented? How does the required return in a segmented market differ from that in an integrated market?

Answer 1

A.       Forecasting cash flows is one of the primary sources of measure of profitability. Projects that run in multiple nations have different ways of forecasting cash flows than America based projects as the multinationals have to consider many things:

1. the state of economy of all the different countries in which it operates like stage of business cycle at with the economy of the country currently is , interest rates, political situation and stability, public trends .etc.

2. The relations between the host country and the mother country that include both financial and non-financial aspects

   Financial being the exchange rates i.e. the price at which the foreign currency is available in terms of local currency and vice versa. And,

Non-financial majorly being the attitude of the local people toward the home country

B. Two project one us based and one based in foreign country can have similar required rate of returns

• when the stage and the status of the economy of the host country is similar to the US

Take for example (per say) Germany and US. Both are developed nations and are major drivers of the world economy thus when one country experiences a recession or an expansion it is very likely that the other country is already or will be experiencing the same.

This interdependence/relation between two similar countries will result in the two have similar if not same required rate of return .

C.   No country alone has the ability to affect the world market all by itself. The world market always has some sort of impact on every market be it local or foreign (for the multinationals). This impact cannot be neglected while calculating anything. Thus the world market is integrated with the foreign market. To nullify this effect of world market on the foreign market the multinationals sometimes segregate the world market from the foreign market.

D. the required return in a segmented market differs from that in an integrated market as it only includes the rate of return required solely in the foreign country. Required rate of return is the measurement of risk, which will differ from country to country.thus will be different from when a particular country (foreign, segregated) from world market (as a whole/integrated)