Transcript Course # and Course Name

International Finance
Multinational
Capital Budgeting
Bill Reese
1
Learning Objectives
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In this unit we will learn:
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What data is needed to calculate the NPV for a
multinational project
How to calculate the NPV for a firm looking to
manufacture and distribute tennis rackets in
Singapore
Direct Investment
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MNC is parent
Subsidiary is child
May be joint venture with national company
Need to calculate NPV and/or IRR
Input Data
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Initial investment
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Capital expenditure
Working capital
Setup costs
Input Data
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Price and consumer demand
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Compare with competitive products
Inflation expectations for future prices
Expected market share growth
Input Data
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Costs
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Variable costs
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Costs of components
Expected inflation
Demand forecast
Fixed costs
Input Data
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Taxes
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Tax laws vary by country
Money to stay in foreign country or repatriated to
U.S.?
Input Data
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Exchange rates
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Hedge or not?
How to forecast?
Effects of forecasting errors
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Sensitivity analysis
Input Data
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Project length
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Political stability in country
Attitude in foreign country towards MNC direct
investment
Risk of expropriation
Plans to sell subsidiary
Input Data
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Required rate of return
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May be higher or lower than if done in U.S.
Risk of project
Political risk of country
Benefit to diversification within company?
Capital Budgeting Example
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MNC wants to develop subsidiary in
Singapore
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Manufacture and sell tennis rackets locally
Project will end in four years
Capital Budgeting Example
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Initial investment
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20 million Singapore dollars (S$)
Includes working capital
Spot XR is .50 $/S$
$10 million
Capital Budgeting Example
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Price and demand
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13
All currency figures are nominal
Year 1
Year 2
Year 3
Year 4
Unit Price
S$350
S$350
S$360
S$380
Demand
60,000
60,000
100,000
100,000
Capital Budgeting Example
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Costs
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Variable costs
VC/Unit
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Year 2
Year 3
Year 4
S$200
S$200
S$250
S$260
Fixed costs
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Year 1
Office lease: S$1 million/year
Overhead: S$1 million/year
Capital Budgeting Example
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Taxes
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Singapore government
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U.S. government
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20% tax on income
10% tax on funds remitted to parent in U.S.
Tax credit for taxes paid in Singapore
Corporate Income Tax Rates
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Capital Budgeting Example
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Project length
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Singapore government will pay parent S$12
million to purchase subsidiary after 4 years
Capital Budgeting Example
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Exchange rates
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Required rate of return
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Spot rate is .50 $/S$
Current spot rate is used as forecast of future
spot rates
Set at 15% based on low country risk for
Singapore
Country Risk Ratings
Determining Country Risk Ratings
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Determining Country Risk Ratings
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Corruption Index Rating
Source: Transparency International, 2009
Capital Budgeting Example
Capital Budgeting Example
Sensitivity Analysis: XR
Sensitivity Analysis: XR
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