Question

Introduction

Decision making in finance is rarely black and white and one decision can be appropriate for one situation and not appropriate for another. Point and counter-point discussions should highlight this as well as expand upon the ability to support a decision that may not be supported by others in the same department.

Initial Post Instructions

Consider the following point and counter-point arguments then use the Internet to learn more about the issue. Which argument to you support? Explain why and offer your own opinion on the issue.

• Point: Country risk does not matter for U.S. projects. U.S.-based MNCs should consider country risk for foreign projects only. A U.S.-based MNC can account for U.S. economic conditions when estimating cash flows of a U.S. project or deriving the required rate of return on a project, but it does not need to consider country risk.
• Counter-Point: Country risk does matter for U.S. projects. Country risk should be considered for U.S. projects. Country risk can indirectly affect the cash flows of a U.S. project. Consider a U.S. project in which supplies are produced and sent to a U.S. exporter. The demand for the supplies will be dependent on the demand for the exports over time, and the demand for exports over time may be dependent on country risk.

Answer 1

We support the counter-Point argument.

Reason & opinion: In today's globalized economies it is very hard to have business projects that do not directly or indirectly depend on some form of international factors. It may be raw materials, or any other part of the supply chain or even a support process that is provided by an international firm. In any case a disruption in any of these factors can affect the project economies and profitability. In addition to the given example of supplying to an exporter, consider another example where the project is to setup & maintain a data center in the U.S. for a new U.S. based, web streaming company that caters to audience worldwide. Now for the company that is required to provide the data center, this may seem like a U.S. based project because it will be completely dealing with a U.S. firm in U.S. dollars. But suppose after an year, one big foreign country bans the services of the media streaming company in their country thus sharply affecting the profitability as well as need for data center capacities, thus eventually it will likely affect the firm that maintains the data center project.

So we see that counter-point is more valid and thus foreign country risks should also be considered for U.S. projects and any possibilities of such risks affecting the project should be explored and analyzed properly.