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 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:

A. the parent company at a very low cost so that there is more profit left to repatriate.

B. a local vendor at a very low cost so that there is more profit left to repatriate.

C. the parent company at a high cost so that there is less profit left to repatriate.

Consider this case:

LeBron Development Inc. is a U.S.-based firm evaluating a project in Mexico.

You have the following information about the project:

LeBron Development Inc. is a U.S.-based firm evaluating a project in Mexico.

You have the following information about the project:

The project requires a 160,000 peso investment today and is expected to generate cash flows of 61,500 pesos at the end of the next three years.The current U.S. exchange rate with the Mexican peso is 12.012 pesos per U.S. dollar, and the exchange rate is expected to remain constant.The firms cost of capital is 10%, 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.)

$-528.87

$-675.77

$-470.10

-$587.63