Explain how to incorporate political risk into the capital budgeting process of a foreign investment project?...

Explain how to incorporate political risk into the capital budgeting process of a foreign investment project? How can political risk be mitigated (managed)

Expert Solution

One. approach is. to adjust the. cost of capital. upward to reflect. political risk and discount. the expected. future cash. flows at. a higher. rate. Alternatively, one. can subtract .insurance premium. for political risk. from the expected future. cash flows and. use the usual. cost of capital. which .is applied. to domestic. capital budgeting. Managing. political risks. is to map. potential risk. management. methods against. the priority risks. Once the organization. establishes a course. of action, the risk. management team. can assign responsibilities. and establish a schedule. for consultation, reporting and review, as with other. risk controls. Companies .actually have. multiple options for. addressing. identified risks. A company .operating in a .country where .there are signs .of corruption in trade practices, for example, may .seek to review .its overall .code of conduct .and step up .local training .activities to ensure .that all rules. are thoroughly. understood.

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