1. Subsidiary and Parent perspective in relation to multinational capital
budgeting.
 Capital budgeting for a multinational project conducted on the viewpoint of
the subsidiary or the parent may vary depending on the tax differentials,
regulations that restrict remittances, excessive remittances, exchange rates
movements etc. A parent perspective is used when a project can create a
positive net present value for the parent should enhance the firm’s value
while a Subsidiary perspective occurs when foreign projects are financed by
foreign subsidiaries.
2. Explain factors to consider in multinational capital budgeting.
 Exchange rates fluctuations
Different scenarios can be considered together with their probability of occurrence.
 Financial arrangements
Financing costs are captured by discount rate, however in foreign projects are
partially financed by foreign subsidiaries an accurate approach is used to separate
the subsidiary investment and consider foreign loan payments as cash outflows.
 Blocked Funds
Some countries require that the earnings generated by the subsidiary be reinvested
locally for at least a certain period of time.
 Uncertain salvage value
Since the salvage value has a significantly impact on the project’s NPV, the MNC
may want to compute the break-even salvage value.
 Prevailing cash flows
The new investment may compete with the existing businesses for the same
customers.
 Host government incentives
A low rate host government loan or a reduced tax rate offered to the subsidiary will
enhance periodic cash flows.
3. Explain the meaning of multinational capital budgeting analysis
 Multinational capital budgeting analysis is the process that involves
analyzing on the cash inflows and the cash outflows with the prospective
long-term investment projects to determine whether the expected returns
are met.
4. Explain the inputs of Multinational Capital budgeting
 Initial Investment
Funds initially invested is necessary to start the project and additional funds
to support the project overtime.
 Price and Consumer demand
Future demand is influenced by economic conditions, which are uncertain.
 Costs
Variable costs can be developed from comparative costs of the components while
fixed costs can be estimated without an estimate of demand.
 Tax
International tax must be determined on any proposed projects.
 Remitted funds
The MNC policy for remitting funds to the parent influences estimated cash flows.
 Required Rate of Return.
The MNC should estimate its cost capital, and then it can drive its required rate of
return on a project based on the risk of that project.
 Salvage values
Depends on the following factors such as success of the project and the attitude of
the host government toward the project.