Capital Budgeting - Part 2

Complexities of Budgeting for a Foreign Project Cash Flows Parent cash flows must be distinguished from project cash flows Parent cash flows often depend on the form of financing Cannibalization from other subsidiaries - Additional cash flows generated by a new investment in one foreign subsidiary may be in part or in whole taken away from another subsidiary, with the net result that the project is favorable from a single subsidiary's point of view but contributes nothing to worldwide cash flows Remittance of funds - differing tax systems, legal and political constraints on the movement of funds, local business norms, and differences in the way financial markets and institutions function Nonfinancial payments can generate cash flows from subsidiaries to the parent - payment of license fees and payments for imports from the parent
Complexities of Budgeting for a Foreign Project Management Expectations Unanticipated foreign exchange rate Segmented national capital markets - opportunity for financial gains or may lead to additional financial costs Host-government subsidized loans - complicates both capital structure and the parent's ability to determine an appropriate weighted average cost of capital for discounting purposes Political risk Terminal value is more difficult to estimate
Complexities of Budgeting for a Foreign Project Project Versus Parent Valuation - A strong theoretical argument exists in favor of analyzing any foreign project from the viewpoint of the parent - Cash flows to the parent are ultimately the basis for dividends to stockholders, reinvestment elsewhere in the world, repayment of corporate-wide debt, and other purposes that affect the firm's many interest groups - However, this viewpoint violates a cardinal concept of capital budgeting, that financial cash flows should not be mixed with operating cash flows
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