9. International capital budgeting

One of the important components of multinational capital budgeting is to analyze the cash flows generated from subsidiary companies.

Foreign governments have certain motivations to restrict the repatriation of earnings of multinational firms to the parent company. This implies that not all earnings and profits generated at the subsidiary can be used by the parent company to pay dividends or to reinvest. Thus, from the perspective of the parent company, the relevant cash flows for the parent company in the foreign investment analysis are the cash flows that:

the subsidiary firm pays to the foreign government as taxes.

the foreign government repatriates.

the subsidiary sends back to the parent company.

Consider this case:

Pellegrini Southern Inc. is a U.S.-based firm evaluating a project in Mexico.

You have the following information about the project:

	The project requires a 130,000 peso investment today and is expected to generate cash flows of 62,250 pesos at the end of the next three years.
	The current U.S. exchange rate with the Mexican peso is 11.876 pesos per U.S. dollar, and the exchange rate is expected to remain constant.
	The firms cost of capital is 8%, and the project is of average risk.

What is the dollar-denominated net present value (NPV) of this project? (Note: Do not round your intermediate calculations.)

$2,946.10

$2,561.83

$2,177.56

$2,818.01

When companies evaluate project investment in foreign nations, they also have to consider the additional risk that foreign projects are exposed to compared to domestic projects, such as exchange rate risk and political risk.

Expropriation is one such risk where the government of a country takes away a private business from its owners without appropriately compensating the owners.

Which of the following actions should companies take to prevent expropriation? Check all that apply.

Repatriate the maximum amount of cash from the subsidiary to the foreign government.

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 so that the subsidiary company pays maximum taxes to the foreign government.