International CapitalBudgetingChapter Fourteen
ChapterOutlineReview of Domestic Capital BudgetingThe Adjusted Present Value ModelCapital Budgeting from the Parent Firm'sPerspectiveCaseApplication:The CentraliaSome Improvement of the APV Model
Chapter Outline ❖Review of Domestic Capital Budgeting ❖The Adjusted Present Value Model ❖Capital Budgeting from the Parent Firm’s Perspective ❖Case Application: The Centralia ❖Some Improvement of the APV Model
Review of Domestic CapitalBudgetingldentify the size and timing of all relevant cashflows on a time line.ldentify the riskiness of the cash flows todetermine the appropriate discount rateFind NPv by discounting the cash flows at theappropriate discount rate.Comparethevalueofcompetingcashflowstreams at the same point in time
❖Identify the size and timing of all relevant cash flows on a time line. ❖Identify the riskiness of the cash flows to determine the appropriate discount rate. ❖Find NPV by discounting the cash flows at the appropriate discount rate. ❖Compare the value of competing cash flow streams at the same point in time. Review of Domestic Capital Budgeting
Reviewof DomesticCapitalBudgetingThe basic net present value equation isTTVTCFZNPV =-Co(1+K)"(1+K)Where:CF, = expected incremental after-tax cash flow in year tTVr = expected after-tax terminal value including return ofnet working capitalCo= initial investment at inceptionK= weighted average cost of capitalT= economic life of the project in yearsThe NPV rule is to accept a project if NPV ≥0
Review of Domestic Capital Budgeting The basic net present value equation is 0 1 (1 ) (1 ) C K TV K CF NPV T T T t t t − + + + = = Where: CFt = expected incremental after-tax cash flow in year t TVT = expected after-tax terminal value including return of net working capital C0 = initial investment at inception K = weighted average cost of capital T = economic life of the project in years The NPV rule is to accept a project if NPV 0
Reviewof DomesticCapitalBudgetingFor our purposes it is necessary to expandthe NPV equation.CF =(R,-OC,-D,-I)(1 - ) + D, + I (1 - t)I is incremental interestR, is incremental revenueexpenseOC, is incremental operatingcash flowt is the marginal tax rateD, is incremental depreciation
Review of Domestic Capital Budgeting For our purposes it is necessary to expand the NPV equation. Rt is incremental revenue OCt is incremental operating cash flow Dt is incremental depreciation It is incremental interest expense is the marginal tax rate CFt = (Rt – OCt – Dt – It )(1 – ) + Dt + It (1 – )