Question

1. How should a firm adjust the capital budgeting for investment in a country where the chance of a government takeover is relatively high?

Answer 1

firm should provide additional rates of discounting in order to discount the risk associated with the investment in the other country where the risk of government takeover is very high.

these kinds of risks must be incorporated into the weighted average cost of capital when there must be a risk weighting of capital budgeting decisions as these are highly qualitative factors and these are not easy to be quantified so there must be an approximation of the rate of discounting based upon the risk associated with investment into foreign projects where the risk of government takeover is very high.

The company needs to be highly conservative in order to record It's cash flows from such projects into countries where risk is high in case of takeover because there are uncertainty related to the receipt of cash flows and this uncertainty will lead to the risk exposure so the risk adjusted weights must be followed.