$125$250$375$500$1.000入20341The APV of the project under leverage is:T(OCF)(1 - t)tD,tI,TVTAPV-Z十Co(1 + K,)T(1 + i)(1 +i)(1 + K,)t= 1$250$500$125$375APV+1.10(1.10)4(1.10)2(1.10)3$19.20$19.20$19.20$19.20$1,000+XX(1.08)41.08(1.08)2(1.08)3APV = $7.09 The firm should accept the project ifit finances with debt
APV = $125 1.10 0 1 2 3 4 -$1,000 $125 $250 $375 $500 + $250 (1.10)2 + $375 (1.10)3 + $500 (1.10)4 + $19.20 (1.08)2 + $19.20 (1.08)3 + $19.20 (1.08)4 $19.20 1.08 + – $1,000 APV = $7.09 The APV of the project under leverage is: The firm should accept the project if it finances with debt. APV =S t = 1 T (OCFt )(1 – ) (1 + Ku ) t C0 TVT (1 + Ku ) T + Dt (1 + i) t + – It (1 + i) t +
International Capital Budgetingfrom the Parent Firm's PerspectiveT(OCF)(1 - t)t DttITVTAPV-ZCo(1 +i)(1 +i)(1 +K))(1 + K)t= 1 CThe APV model is useful for a domestic firmanalyzing a domestic capital expenditure or for aforeign subsidiary of an MNC analyzing aproposed capital expenditure from the subsidiary'sviewpoint.TheAPVmodelisNOTuseful foranMNCinanalyzing foreign capital expenditure from theparent firm's perspective
International Capital Budgeting from the Parent Firm’s Perspective ❖The APV model is useful for a domestic firm analyzing a domestic capital expenditure or for a foreign subsidiary of an MNC analyzing a proposed capital expenditure from the subsidiary’s viewpoint. ❖The APV model is NOT useful for an MNC in analyzing foreign capital expenditure from the parent firm’s perspective. APV =S t = 1 T (OCFt )(1 – ) (1 + Ku ) t C0 TVT (1 + Ku ) T + Dt (1 + i) t + – It (1 + i) t +
International Capital Budgetingfrom the Parent Firm's PerspectiveDonald Lessard developed an APV model forMNCs analyzing a foreign capital expenditure. Themodel recognizes many of the particulars peculiartoforeign direct investment.TS,tl,2S,tDT S,OCF(1-t)L>APV :(1+ Kud)(1+i)t=-lt=1TS.TVTS,LP2-S.Co+ S,RF+ S.CL+(1+ K.d)(1+id)=1
International Capital Budgeting from the Parent Firm’s Perspective ❖Donald Lessard developed an APV model for MNCs analyzing a foreign capital expenditure. The model recognizes many of the particulars peculiar to foreign direct investment. = = = = + − + + + + + + + + + + − = T t t d t t T u d T T T t t d t t T t t d t t T t t u d t t i S LP S C S RF S CL K S TV i S τ I i S τD K S OCF τ APV 1 0 0 0 0 0 0 1 1 1 (1 ) (1 ) (1 ) (1 ) (1 ) (1 )
APV Model of Capital Budgeting from theParent Firm's Perspective11S.+2StlS,OCF(1 - t)tD人NZAPV =台(1 + ia)(1 + Kud)(+i4=1S,TVT+2- SoCo + SoRFo + SoCLo++(1 + Kua)台(1 + ia)
Denotes the present value (in the parent’s currency) of any concessionary loans, CL0 , and loan payments, LPt , discounted at id . S0RF0 represents the value of accumulated restricted funds (in the amount of RF0 ) that are freed up by the project. The marginal corporate tax rate, , is the larger of the parent’s or foreign subsidiary’s. OCFt represents only the portion of operating cash flows available for remittance that can be legally remitted to the parent firm. The operating cash flows must be discounted at the unlevered domestic rate The operating cash flows must be translated back into the parent firm’s currency at the spot rate expected to prevail in each period. APV Model of Capital Budgeting from the Parent Firm’s Perspective APV = S t = 1 T (1 + Kud) t TVT (1 + Kud) T + Dt (1 + id ) t + – StOCFt (1 – ) S0C0 + S0RF0 + S0CL0 + S t = 1 T St It (1 + id ) S t St + t = 1 T St LPt (1 + id ) S t St t = 1 T
Capital Budgetingfromthe ParentFirm's PerspectiveOne recipe for international decisionmakers:Estimate future cash flows in foreigncurrencyConvert to the home currency at thepredicted exchange rate.·Use PPP, IRP, et ceteraforthepredictionsCalculate NPV using the home currencycost of capital
❖One recipe for international decision makers: ▪ Estimate future cash flows in foreign currency. ▪ Convert to the home currency at the predicted exchange rate. • Use PPP, IRP, et cetera for the predictions. ▪ Calculate NPV using the home currency cost of capital. Capital Budgeting from the Parent Firm’s Perspective