Question

1. How to company's value a foreign project?

2. What is the difference between Project and Parent valuation?

3. Shall we use discounted cash flow valuation or real options analysis?

Answer 1

1. Companies may value of foreign project using capital budgeting methods. In the process of performing and PV analysis for foreign investments it is imperative to identify all the relevant cash flows, estimate the corporations taxability and take into account inflation and real cash flows. The appraisal includes challenges such as correct forecast of future exchange rates, differences in the tax policies between countries and intercompany cash flows.

2. Parent valuations generally differ from the project evaluations and depends heavily on the form of Financing. The additional cash flows from a project may be taken away buy another subsidiary and hence the positive cash flows arising from a project may in fact I had no value to the parent organisation. There are differences between remittance from investment in a foreign company due to differences in tax systems and political constraints. From the parents point of view investment cash flows are considered as operating cash flows rather than financing primarily due to gravity answers of royalty or interest payments. This valuation gives closer results through a traditional npv capital budgeting method. Project valuation on the other hand provides the effect on consolidated EPS of the company.

3. Real option analysis can also be used for valuation of foreign Investments. This method is an improvement over the discounted cash flow analysis as it allows capturing the value of strategic options. Options such as the option to abandon, alter the capacity of the investment or the option to differ can all be considered in the valuation.