Question 1

When evaluating international project cash flows, which of the following factors is relevant?​

Accepted Answer

All of the factors mentioned - future inflation, blocked funds, and exchange rates - are relevant when evaluating international project cash flows. Future inflation can affect the real value of cash flows, blocked funds can limit the availability of cash, and exchange rates can impact the value of cash flows in different currencies. Therefore, D is the correct answer.

Question 2

Blocked funds may penalize a project if the return on the forced reinvestment in the foreign country is less than the required rate of return on the project.

Accepted Answer

Blocked funds refer to funds that are trapped or stuck in a foreign country due to restrictions on their repatriation. If a project has blocked funds and is forced to reinvest those funds in the foreign country, it may have a lower return than the required rate of return on the project. This can penalize the project as it may not achieve its desired financial goals. Therefore, the statement is true.

Question 3

In capital budgeting analysis, the use of a cumulative NPV is useful for:​

Accepted Answer

Cumulative NPV is used to determine the time required to achieve a positive NPV, as it tracks the accumulation of net present values over time.

Question 4

When assessing a German project administered by a German subsidiary of a U.S.-based MNC solely from the German subsidiary's perspective, which variable will most likely influence the capital budgeting analysis?​

Accepted Answer

When assessing a German project from the perspective of a German subsidiary, the most influential variable in the capital budgeting analysis would be the German government's tax rate. This is because the subsidiary would be subject to German taxation laws and regulations, which could significantly impact the project's profitability and viability. The other variables such as withholding tax rate, euro's exchange rate, and U.S. tax rate on earnings remitted to the United States may also have an impact, but they are not as significant as the local tax regulations. Therefore, option D is the best choice.

Question 5

If a multinational project is assessed from the subsidiary's perspective, withholding taxes are ignored for project assessment.

Accepted Answer

The answer of If a multinational project is assessed from...

Question 6

An MNC is considering establishing a two-year project in New Zealand with a $30 million initial investment. The firm's cost of capital is 12 percent. The required rate of return on this project is 18 percent. The project is expected to generate cash flows of NZ$12 million in Year 1 and NZ$30 million in Year 2, excluding the salvage value. Assume no taxes and a stable exchange rate of $.60 per NZ$ over the next two years. All cash flows are remitted to the parent. What is the break-even salvage value?​

Accepted Answer

The break-even salvage value is the amount that makes the net present value (NPV) of the project equal to zero, given the project's cash flows and the required rate of return. To find this, we first calculate the present value (PV) of the cash flows, then solve for the salvage value that makes the NPV equal to zero.1. Convert NZ$ cash flows to US$ at the exchange rate of $.60/NZ$:   - Year 1: NZ$12 million * $.60 = $7.2 million   - Year 2: NZ$30 million * $.60 = $18 million2. Calculate the present value of these cash flows using the required rate of return of 18%:   - PV of Year 1 cash flow: $7.2 million / (1 + 0.18)^1 = $6.1 million (approximately)   - PV of Year 2 cash flow: $18 million / (1 + 0.18)^2 = $12.9 million (approximately)3. The total PV of cash flows without the salvage value is $6.1 million + $12.9 million = $19 million.4. To break even, the total PV of the project (including the salvage value) must equal the initial investment of $30 million. Thus, the PV of the salvage value must make up the difference:   - Required PV of salvage value = $30 million - $19 million = $11 million5. Solve for the nominal value of the salvage value in Year 2 that has a PV of $11 million:   - Salvage value in Year 2 = $11 million * (1 + 0.18)^2 = $11 million * 1.3924 = $15.316 million (approximately)6. Convert this back to NZ$ at the exchange rate of $.60/NZ$:   - Salvage value in NZ$ = $15.316 million / $.60 = NZ$25.526 million (approximately)Therefore, the break-even salvage value is about NZ$25 million.

Question 7

Assume an MNC establishes a subsidiary in a country where it has no other existing business. The present value of parent cash flows from this subsidiary is more sensitive to exchange rate movements when:​

Accepted Answer

The answer of Assume an MNC establishes a subsidiary in...

Question 8

If the parent charges the subsidiary administrative fees, the earnings from the project will appear low to the parent and high to the subsidiary.

Accepted Answer

When a parent charges the subsidiary administrative fees, it increases the expenses of the subsidiary, thus reducing its earnings, while increasing the income of the parent, making the earnings appear higher for the parent and lower for the subsidiary.

Question 9

If a U.S. parent is setting up a French subsidiary, and funds from the subsidiary will be periodically sent to the parent, the ideal situation from the parent's perspective is a ____ aFter the subsidiary is established.

Accepted Answer

A strengthening euro is ideal for the U.S. parent company because as the euro strengthens against the dollar, the funds sent from the French subsidiary will convert into more dollars, increasing the value of the remittances.

Question 10

Assume the parent of a U.S.-based MNC plans to completely finance the establishment of its British subsidiary with existing funds from retained earnings from U.S. operations. According to the text, the discount rate used in the capital budgeting analysis on this project will be most affected by:​

Accepted Answer

The discount rate used in the capital budgeting analysis should reflect the parent's cost of capital, which takes into account the risk and return expectations of its investors. In this case, the funding for the British subsidiary is coming from retained earnings from U.S. operations, so the parent's cost of capital will be the primary determinant of the discount rate used in the analysis. While economic conditions and borrowing costs in the UK may impact the subsidiary's operations, they will not directly impact the discount rate used in the capital budgeting analysis.

Question 11

Other things being equal, a blocked funds restriction is more likely to have a significant adverse effect on a project if the currency of that country is expected to ____ over time, and if the interest rate in that country is relatively ____.

Accepted Answer

A blocked funds restriction can significantly impact a project if the currency of the country is expected to depreciate over time, making repatriated funds less valuable. Additionally, if the interest rate in that country is relatively low, it means the funds held there earn less interest, further reducing the overall return on the project.

Question 12

Assume a U.S.-based MNC has a Chilean subsidiary that annually remits 30 million Chilean pesos to the United States. If the peso ____, the dollar amount of remitted funds ____.

Accepted Answer

If the Chilean peso depreciates, it means that it loses value against the U.S. dollar, which will result in fewer dollars being received for the same amount of pesos. Therefore, the dollar amount of remitted funds decreases.

Question 13

Other things being equal, firms from a particular home country will engage in more international acquisitions if they expect foreign currencies to ____ against their home currency, and if their cost of capital is relatively ____.

Accepted Answer

Firms are more likely to engage in international acquisitions if they expect foreign currencies to appreciate against their home currency, making future earnings more valuable when converted back to their home currency. Additionally, a lower cost of capital makes financing the acquisition cheaper, further incentivizing international acquisitions.

Question 14

A firm considers an exporting project and will invoice the exports in dollars. Estimating the expected cash flows in dollars would be more difficult if the currency of the foreign country is ____.

Accepted Answer

If the currency of the foreign country is volatile, it means that the exchange rate between the dollar and that currency is subject to frequent and unpredictable changes, making it harder for the firm to accurately estimate their expected cash flows in dollars. A fixed currency or a stable currency would make it easier to estimate expected cash flows. However, if the firm is not exposed to currency fluctuations (e.g. if they use currency hedging), then none of the options would apply.

Question 15

The impact of blocked funds on the net present value of a foreign project will be greater if interest rates are ____ in the host country and there are ____ investment opportunities in the host country.

Accepted Answer

The answer of The impact of blocked funds on the...

Question 16

If an MNC exports to a country and then establishes a subsidiary to produce and sell the same product in that country, cash flows from existing operations would likely be ____ affected by the project. If an MNC establishes a foreign manufacturing subsidiary that buys components from the parent, the cash flows from existing operations would likely be ____ affected by the project.

Accepted Answer

If an MNC exports to a country and then establishes a subsidiary to produce and sell the same product in that country, cash flows from existing operations would likely be adversely affected by the project because the subsidiary may compete with the parent company, resulting in a loss of market share and revenue.

If an MNC establishes a foreign manufacturing subsidiary that buys components from the parent, the cash flows from existing operations would likely be favorably affected by the project. This is because the subsidiary's purchase of components from the parent would increase the parent's revenue and profitability.

Question 17

In general, increased investment by the parent in the foreign subsidiary causes more exchange rate exposure to the parent over time because the cash flows remitted to the parent will be larger.

Accepted Answer

When the parent invests more in the foreign subsidiary, the subsidiary's cash flows and profits will also increase. This means that when the subsidiary remits these cash flows back to the parent, they will be larger and subject to more exchange rate fluctuations. Therefore, increased investment by the parent in the foreign subsidiary causes more exchange rate exposure to the parent over time.

Question 18

According to the text, in order to develop a distribution of possible net present values from international projects, a firm should use:

Accepted Answer

A firm should use simulation to develop a distribution of possible net present values from international projects. This involves creating a model that incorporates various input assumptions and running multiple simulations to generate a range of possible outcomes. This approach allows for a more comprehensive analysis of risks and uncertainties associated with international projects.

Question 19

The break-even salvage value of a particular project is the salvage value necessary to:​

Accepted Answer

The break-even salvage value of a particular project is the salvage value that would result in the project having a net present value of zero. This means that the project would neither make a profit nor incur a loss, but just break even. Therefore, the correct choice is D which states that the break-even salvage value helps achieve a zero net present value for the project.

Question 20

The discrepancy between the feasibility of a project in a host country from the perspective of the U.S. parent versus the subsidiary administering the project is likely to be greater for projects in countries where:​

Accepted Answer

If the currency of the host country is expected to depreciate consistently, the subsidiary administering the project may find it more difficult to maintain profitability or generate the expected return on investment. This can lead to a discrepancy between the perspectives of the U.S. parent company and the subsidiary. The other options (taxes and blocked fund restrictions) do not necessarily affect the feasibility of a project in the same way.

Quiz 14: Multinational Capital Budgeting

When evaluating international project cash flows, which of the following factors is relevant?

Blocked funds may penalize a project if the return on the forced reinvestment in the foreign country is less than the required rate of return on the project.

In capital budgeting analysis, the use of a cumulative NPV is useful for:

When assessing a German project administered by a German subsidiary of a U.S.-based MNC solely from the German subsidiary's perspective, which variable will most likely influence the capital budgeting analysis?

If a multinational project is assessed from the subsidiary's perspective, withholding taxes are ignored for project assessment.

Assume an MNC establishes a subsidiary in a country where it has no other existing business. The present value of parent cash flows from this subsidiary is more sensitive to exchange rate movements when:

If the parent charges the subsidiary administrative fees, the earnings from the project will appear low to the parent and high to the subsidiary.

If a U.S. parent is setting up a French subsidiary, and funds from the subsidiary will be periodically sent to the parent, the ideal situation from the parent's perspective is a ____ aFter the subsidiary is established.

Assume the parent of a U.S.-based MNC plans to completely finance the establishment of its British subsidiary with existing funds from retained earnings from U.S. operations. According to the text, the discount rate used in the capital budgeting analysis on this project will be most affected by:

Other things being equal, a blocked funds restriction is more likely to have a significant adverse effect on a project if the currency of that country is expected to over time, and if the interest rate in that country is relatively .

Assume a U.S.-based MNC has a Chilean subsidiary that annually remits 30 million Chilean pesos to the United States. If the peso , the dollar amount of remitted funds .

Other things being equal, firms from a particular home country will engage in more international acquisitions if they expect foreign currencies to against their home currency, and if their cost of capital is relatively .

A firm considers an exporting project and will invoice the exports in dollars. Estimating the expected cash flows in dollars would be more difficult if the currency of the foreign country is ____.

The impact of blocked funds on the net present value of a foreign project will be greater if interest rates are in the host country and there are investment opportunities in the host country.

In general, increased investment by the parent in the foreign subsidiary causes more exchange rate exposure to the parent over time because the cash flows remitted to the parent will be larger.

According to the text, in order to develop a distribution of possible net present values from international projects, a firm should use:

The break-even salvage value of a particular project is the salvage value necessary to:

The discrepancy between the feasibility of a project in a host country from the perspective of the U.S. parent versus the subsidiary administering the project is likely to be greater for projects in countries where:

Quiz 14: Multinational Capital Budgeting

When evaluating international project cash flows, which of the following factors is relevant?​

Blocked funds may penalize a project if the return on the forced reinvestment in the foreign country is less than the required rate of return on the project.

In capital budgeting analysis, the use of a cumulative NPV is useful for:​

When assessing a German project administered by a German subsidiary of a U.S.-based MNC solely from the German subsidiary's perspective, which variable will most likely influence the capital budgeting analysis?​

If a multinational project is assessed from the subsidiary's perspective, withholding taxes are ignored for project assessment.

Assume an MNC establishes a subsidiary in a country where it has no other existing business. The present value of parent cash flows from this subsidiary is more sensitive to exchange rate movements when:​

If the parent charges the subsidiary administrative fees, the earnings from the project will appear low to the parent and high to the subsidiary.

If a U.S. parent is setting up a French subsidiary, and funds from the subsidiary will be periodically sent to the parent, the ideal situation from the parent's perspective is a ____ aFter the subsidiary is established.

Assume the parent of a U.S.-based MNC plans to completely finance the establishment of its British subsidiary with existing funds from retained earnings from U.S. operations. According to the text, the discount rate used in the capital budgeting analysis on this project will be most affected by:​

Other things being equal, a blocked funds restriction is more likely to have a significant adverse effect on a project if the currency of that country is expected to ____ over time, and if the interest rate in that country is relatively ____.

Assume a U.S.-based MNC has a Chilean subsidiary that annually remits 30 million Chilean pesos to the United States. If the peso ____, the dollar amount of remitted funds ____.

Other things being equal, firms from a particular home country will engage in more international acquisitions if they expect foreign currencies to ____ against their home currency, and if their cost of capital is relatively ____.

A firm considers an exporting project and will invoice the exports in dollars. Estimating the expected cash flows in dollars would be more difficult if the currency of the foreign country is ____.

The impact of blocked funds on the net present value of a foreign project will be greater if interest rates are ____ in the host country and there are ____ investment opportunities in the host country.

In general, increased investment by the parent in the foreign subsidiary causes more exchange rate exposure to the parent over time because the cash flows remitted to the parent will be larger.

According to the text, in order to develop a distribution of possible net present values from international projects, a firm should use:

The break-even salvage value of a particular project is the salvage value necessary to:​

The discrepancy between the feasibility of a project in a host country from the perspective of the U.S. parent versus the subsidiary administering the project is likely to be greater for projects in countries where:​

When evaluating international project cash flows, which of the following factors is relevant?

In capital budgeting analysis, the use of a cumulative NPV is useful for:

When assessing a German project administered by a German subsidiary of a U.S.-based MNC solely from the German subsidiary's perspective, which variable will most likely influence the capital budgeting analysis?

Assume an MNC establishes a subsidiary in a country where it has no other existing business. The present value of parent cash flows from this subsidiary is more sensitive to exchange rate movements when:

Assume the parent of a U.S.-based MNC plans to completely finance the establishment of its British subsidiary with existing funds from retained earnings from U.S. operations. According to the text, the discount rate used in the capital budgeting analysis on this project will be most affected by:

Other things being equal, a blocked funds restriction is more likely to have a significant adverse effect on a project if the currency of that country is expected to over time, and if the interest rate in that country is relatively .

Assume a U.S.-based MNC has a Chilean subsidiary that annually remits 30 million Chilean pesos to the United States. If the peso , the dollar amount of remitted funds .

Other things being equal, firms from a particular home country will engage in more international acquisitions if they expect foreign currencies to against their home currency, and if their cost of capital is relatively .

The impact of blocked funds on the net present value of a foreign project will be greater if interest rates are in the host country and there are investment opportunities in the host country.

The break-even salvage value of a particular project is the salvage value necessary to:

The discrepancy between the feasibility of a project in a host country from the perspective of the U.S. parent versus the subsidiary administering the project is likely to be greater for projects in countries where: