Question

How does multinational capital budgeting differ from domestic only capital budgeting? How are they similar?

Answer 1

In principe multinational capital budgeting and domestic capitla budgeting are similar i.e. in the sense of assessing the value of the project through discounted cash flows. The cash flows are discounted at the risk adjusted cost of capital.The project is accepted only if the net present value is positive i.e. the discounted cash flows exceed the cost of the investment. However significant differences also have to be considered between the two:

1. Multinational projects involve one or more foreign currencies which makes the calculations more complex.

2. The parent cash flows must be distinguished from the project cash flows.

3. All cash flows must be converted to the parent company's currency.

4. The possibility of the risk of foreign exchange must be incorporated in to the project and determine its effect on the parent's cash flow.

5. Political risk in the foreign country, the various restrictions on repartriation must be considered as well,.

6. The taxation elements of both the parent and the host country's rules must be understood.