Post on 07-Apr-2018
8/4/2019 Determinants of the Cost of International Projects & Their Management by Rajat Jhingan
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Determinants of the cost
ofInternational Projects
&their Management
byRajat Jhingan
PGDM FT (08-10)
8/4/2019 Determinants of the Cost of International Projects & Their Management by Rajat Jhingan
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Capital BudgetingCapital budgeting requires estimation of a projects
incremental cash flows - which are determined by
estimating worldwide cash flows with and without the
project.There are two main methods of international capital
budgeting, centralized and decentralized
Centralized requires exchange rate forecasts
Decentralized requires a local-currency cost of capital.
The method a firm selects should depend on its
comparative advantage in estimating each
By: Rajat Jhingan
8/4/2019 Determinants of the Cost of International Projects & Their Management by Rajat Jhingan
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International Project : Objectives
Shareholders wealth is created when return in the
Present Value is more than Investment Cost
Firm that could source funds internationally rather
domestically will have lower cost of capital.
Greater Opportunities to raise funds
Positive NPVs
APV Model given by Donald Lessard (1985)
By: Rajat Jhingan
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Determinants of cost of International Projects
Cash flows
Marginal corporate tax rate
Operating cash flow
Incremental revenues & operating costRestricted funds
Concessionary loans
WACC
AdditionalTransfer Pricing Strategies, LicensingAgreements, Royalty Agreements
By: Rajat Jhingan
8/4/2019 Determinants of the Cost of International Projects & Their Management by Rajat Jhingan
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ADJUSTED PRESENT VALUE Given by: Donald Lessard (1985)
ValueAdditivity approach to capital budgeting.
Each cash flow is discounted at a rate of discount consistent with the
risk inherent in the cash flow.
Useful for:
MNC for analyzing one of its domestic capital expenditure
Foreign subsidiary of the MNC, a proposed capital expenditure
from the subsidiarys viewpoint.
A project may have a positive APV from the subsidiarys
perspective and a negative APV from the parents perspective.
The model recognizes that the cash flows will be dominated in a
foreign currency and will have to be converted into the currency of
the parent. By: Rajat Jhingan
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Estimate Future Expected Exchange Rate
It is required to Estimate Future Expected Exchange Rate in order toimplement the APV framework.
PPP theory is helpful in Estimate Future Expected Exchange Rate.
St = So (1+ d)t
(1+ f) t
St= future expected exchange rate
T= no of years
d= expected long run annual rate of inflation in the homecountry
F= rate of foreign land
So= current exchange rate
By: Rajat Jhingan
8/4/2019 Determinants of the Cost of International Projects & Their Management by Rajat Jhingan
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Political Risk Centralized capital budgeting requires expected cash
flows to be adjusted for political risk - not cost of
capital.
Foreign political risk is unlikely to be systematic to the
risks of domestic shareholder portfolios.
Sensitivity analysis is an alternative to calculation of
exact political risk probabilities: solve for probability
that sets NPV=0 and then ask whether its reasonable -
if so, NPV is quite possibly negative.
By: Rajat Jhingan
8/4/2019 Determinants of the Cost of International Projects & Their Management by Rajat Jhingan
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Thank You!!!!
By: Rajat Jhingan