CAPITAL BUDGETING FOR INTERNATIONAL PROJECT INVESTMENT DECISIONS
Chapter notes, video classes, MCQ practice tests and quick-revision one-liners for Advanced Business and Financial Management — CAIIB.
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What is the primary objective of capital budgeting for international project investment decisions?
The primary objective is to evaluate and select long-term investment projects in foreign countries that maximise the firm's value, considering cash flows, risk, and the cost of capital across different currencies and regulatory environments.
What is the net present value (NPV) method used for in international capital budgeting?
To evaluate if a foreign project creates shareholder value.
How does the Adjusted Present Value (APV) method differ from the traditional NPV method in international capital budgeting?
APV separates the base-case NPV (as if all-equity financed) from the present value of financing side effects such as tax shields, subsidised loans, and issue costs, making it more transparent for cross-border projects where financing structures are complex.
What is repatriation risk in international project investment?
Risk that host country restricts profit or fund transfers to parent.
What is the significance of the parent perspective versus the project perspective in international capital budgeting?
The project perspective evaluates cash flows at the subsidiary level in local currency, while the parent perspective focuses on after-tax cash flows remittable to the parent, which may differ due to taxes, blocked funds, and transfer pricing, making the parent perspective more relevant for value creation.
What is the discount rate adjustment method for handling country risk?
Adding a country risk premium to the base discount rate.
Why must blocked funds be treated separately in international capital budgeting?
Blocked funds are host-country restrictions that prevent repatriation of profits or capital; since the parent cannot use these funds freely, they must be discounted at a lower rate or excluded from the base NPV and valued only by their alternative use within the host country.
How does currency depreciation affect the parent's cash flows from a foreign subsidiary?
It reduces the home currency value of repatriated earnings.
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