Chapter International Seventeen 17 Capital budgeting Chapter objective This chapter discusses the methodology that a multinational firm can use to analyze the investment of capital in a foreign country
INTERNATIONAL FINANCIAL MANAGEMENT EUN / RESNICK Second Edition 17 Chapter International Seventeen Capital Budgeting Chapter Objective: This chapter discusses the methodology that a multinational firm can use to analyze the investment of capital in a foreign country
Chapter Outline Review of domestic Capital Budgeting o The Adjusted Present Value Model o Capital budgeting from the parent Firms Perspective e Risk adjustment in the capital budgeting process ● Sensitivity analysis ● Real options McGraw-Hilylrwoin 17-1 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 17-1 Chapter Outline ⚫ Review of Domestic Capital Budgeting ⚫ The Adjusted Present Value Model ⚫ Capital Budgeting from the Parent Firm’s Perspective ⚫ Risk Adjustment in the Capital Budgeting Process ⚫ Sensitivity Analysis ⚫ Real Options
Review of Domestic Capital Budgeting Identify the size and TIMING of all relevant cash flows on a time line 2. Identify the risKinesS of the cash flows to determine the appropriate discount rate 3. Find NPv by discounting the cash flows at the appropriate discount rate 4. Compare the value of competing cash flow streams at the same point in time McGraw-Hilylrwoin 17-2 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 17-2 1. Identify the SIZE and TIMING of all relevant cash flows on a time line. 2. Identify the RISKINESS of the cash flows to determine the appropriate discount rate. 3. Find NPV by discounting the cash flows at the appropriate discount rate. 4. Compare the value of competing cash flow streams at the same point in time. Review of Domestic Capital Budgeting
Review of Domestic Capital Budgeting The basic net present value equation is NP=∑ CE (1+K)(1+K)0 Where CF=expected incremental after-tax cash flow in year t TV=expected after tax cash flow in year T, including return of net working capital Co=initial investment at inception, K= weighted average cost of capital T=economic life of the project in years McGraw-Hilylrwoin 17-3 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 17-3 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 cash flow in year T, 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
Review of Domestic Capital Budgeting The NPV rule is to accept a project if NPv>0 CE NPv C≥0 台(1+K)(1+K) and to reject a project if NPV<o NP=∑xm+ Cn≤0 +K)(1+K McGraw-Hilylrwoin 174 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 17-4 Review of Domestic Capital Budgeting The NPV rule is to accept a project if NPV 0 0 (1 ) (1 ) 0 1 − + + + = = C K TV K CF NPV T T T t t t and to reject a project if NPV 0 0. (1 ) (1 ) 0 1 − + + + = = C K TV K CF NPV T T T t t t