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8. International capital budgeting One of the important components of multinational capital budgeting is to analyze the cash flow generated from subsidiary companies. Foreign governments
8. International capital budgeting One of the important components of multinational capital budgeting is to analyze the cash flow generated from subsidiary companies. Foreign governments often have restrictions on the amount of cash flows that the subsidiary company can repatriate to the parent company. Companies use different techniques to work around the restrictions. One such method is transfer pricing, which involves the subsidiary company obtaining raw materials from O the parent company at a high cost so that there is less profit left to repatriate. O a local vender at a very low cost so that there is more profit left to repatriate. O the parent company at a very low cost so that there is more profit left to repatriate. Consider this case: Sacramene Products Co. is a U.S.based firm evaluating a project in Mexico. You have the following information about the project: . The project requires a 170,000 peso investment today and is expected to generate cash flow of 63,400 pesos at the end of the next three years . The current U.S. exchange rate with the Mexican peso is 10.946 pesos per U.S. dollar, and the exchange rate is expected to remain constant. . The firm's cost of capital is 10%, and the project is of average risk. What is the dollar denominated not present value (NPV) of this project? (Note: Do not round your intermediate calculations.) O $.901.42 O $.957.75 0 $1,126,77 O 5-1,070.45 When companies evaluate project investment in foreign nations, they also have to consider the additional risk that foreign projects are exposed to d to domestic projects, such as exchange rate risk and political risk Expropriation is one such risk where the government of a country takes amay a private business from its owners without appropriately compensating the owners. Which of the following action should companies take to prevent expropriation? Check all that apply. Block the amount of cash flow coming from the subsidiary firm to the parent company. Structure the operations of the subsidiary such that the subsidiary derives much of its value only via its relationship or integration with the parent company Partner with local companies to get access to local financing Use transfer pricing to buy raw materials from the parent company at the lowest possible price to minimize the profits the parent company can make
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