Question

How to company's value a foreign project? What is the difference between Project and Parent valuation.

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

Answer 1

The basic steps in valuing an MNC's foreign project are as follows :

1. The capital that the parent company is intending to invest.

2. The appropriate discount rate taking into account the curreny rate difference between both countries.

3. Estimating the cash inflows and outflows from the project over its life and the salvage value of the assets.

Project valuation is the assesement of the project only in comparison with the local firms or local projects. The competitiveness of the project is determined by determining if the project yields more returns than a local project.

Parent valuation is viewing the project from the parent company's point of view since it is investing the initial cash flows and will be the one affected directly if the project does not yield returns as anticipated. In this case the project's cash in flows are combined with the operating incomes of the parent.

Discounted cash flow analysis is very sensitive to the estimation of cash flows. A slight variation or inaccurate estimation can lead to incorrect estimation of the value of the project.

Real option analysis is a technique in which the firm has an option to acquire, expand ,contract or abandon the project before an opportunity ceases to exist. It gives the managers a strategic option about investment in projects and offers flexibility. This method certainly overcomes the shortfalls of NPV, discounted cash flow techniques and should be preferred while evaluating a option.