• Chapter13: Direct Foreign Investment
• Chapter14: Multinational Capital Budgeting

Chapter 13

1.Why do you think U.S. firms commonly use joint ventures as a strategy to enter China?

2.What are some risks of international business that may not exist for local business?

Chapter 14

3.Capital Budgeting With Hedging.Baxter Co. considers a project with Thailand's government. If it accepts the project, it will definitely receive one lump sum cash flow of 10 million Thai baht in five years. The spot rate of the Thai baht is presently $0.03. The annualized interest rate for a 5-year period is 4% in the U.S. and 17% in Thailand. Interest rate parity exists. Baxter plans to hedge its cash flows with a forward contract. What is the dollar amount of cash flows that Baxter will receive in five years if it accepts this project?

4.Sensitivity of NPV to Conditions.Burton Co., based in the U.S., considers a project in which it has an initial outlay of $3 million and expects to receive 10 million Swiss francs (SF) in one year. The spot rate of the franc is $.80. Burton Co. decides to purchase put options on Swiss francs with an exercise price of $.78 and a premium of $.02 per unit to hedge its receivables. It has a required rate of return of 20 percent.

a. Determine the net present value of this project for Burton Co. based on the forecast that the Swiss franc will be valued at $.70 at the end of one year.

b. Assume the same information in part (a), but with the following adjustment. While Burton expected to receive 10 million Swiss francs, assume that there were unexpected weak economic conditions in Switzerland after Burton initiated the project. Consequently, Burton received only 6 million Swiss francs at the end of the year. Also assume that the spot rate of the franc at the end of the year was $.79. Determine the net present value of this project for Burton Co. if these conditions occur.