Question

1. Define Multinational capital budgeting and roles of Proxy firm in multinational capital budgeting?

Answer 1

Multinational capital budgeting, like traditional capital budgeting, focuses on cash inflows and outflows associated with long-term investments.
Multinational capital budgeting techniques are used in foreign direct investment analysis.

Basic steps of multinational capital budgeting are:
1. Identify the capital put at risk.
2. Estimate the future cash flows generated by the project.
3. Identify the appropriate discount rate.
4. Apply traditional capital budgeting decision criteria such as NPV and IRR to determine the acceptability or ranking of potential projects.

Complexities of Budgeting for a Foreign Project
• Parent cash flows must be distinguished from project cash flows.
• Parent cash flows often depend on the form of financing which means that financing cash flows cannot be clearly
separated.
• Additional cash flows from a new subsidiary may reduce the cash flows from another subsidiary.
• Nonfinancial payments such as license fee and import payments can generate cash flows from subsidiaries.

Complexities of Budgeting for a Foreign Project
• Differing rates of national inflation have to be anticipated.
• The possibility of unanticipated changes in foreign exchange
rates must be kept in mind.
• Political risk must be evaluated.
• Terminal value may be hard to estimate because potential
buyers may have different views about the value of the
company’s cash flows.