. International capital budgeting Aa Aa One of the important components of multinational capital budgeting is to analyze the cash flows generated from ubsidiary companies. oreign governments often have restrictions on the amount of cash flows that the subsidiary company can repatriat o the parent company. Companies use different techniques to work around the restrictions. One such method is ransfer pricing, which involves the subsidiary company obtaining raw materials from: A local vendor at a very low cost so that there is more profit left to repatriate The parent company at a high cost so that there is less profit left to repatriate The parent company at a very low cost that there is more profit left to repatriate Consider this case: Sacramone Products Co. is a U.S. firm evaluating a project in Australia. You have the following information about th -roject: The project requires an investment of AU$800,000 today and is expected to generate cash flows of AU$900,000 at the end of each of the next two years. The current exchange rate of the U.S. dollar against the Australian dollar is $0.7755 per Australian dollar (AU$). The one-year forward exchange rate is $0.8022 / AU$, and the two-year forward exchange rate is $0.8143 / AU$. The firm's weighted average cost of capital (WACC) is 8%, and the project is of average risk. Vhat is the dollar-denominated net present value (NPV) of this project? $642,597 O $811,702
. International capital budgeting Aa Aa One of the important components of multinational capital budgeting is to analyze the cash flows generated from ubsidiary companies. oreign governments often have restrictions on the amount of cash flows that the subsidiary company can repatriat o the parent company. Companies use different techniques to work around the restrictions. One such method is ransfer pricing, which involves the subsidiary company obtaining raw materials from: A local vendor at a very low cost so that there is more profit left to repatriate The parent company at a high cost so that there is less profit left to repatriate The parent company at a very low cost that there is more profit left to repatriate Consider this case: Sacramone Products Co. is a U.S. firm evaluating a project in Australia. You have the following information about th -roject: The project requires an investment of AU$800,000 today and is expected to generate cash flows of AU$900,000 at the end of each of the next two years. The current exchange rate of the U.S. dollar against the Australian dollar is $0.7755 per Australian dollar (AU$). The one-year forward exchange rate is $0.8022 / AU$, and the two-year forward exchange rate is $0.8143 / AU$. The firm's weighted average cost of capital (WACC) is 8%, and the project is of average risk. Vhat is the dollar-denominated net present value (NPV) of this project? $642,597 O $811,702
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Transcribed Image Text:The one-year forward exchange rate is $0.8022 / AU$, and the two-year forward exchange rate
is $0.8143 / AU$.
The firm's weighted average cost of capital (WACC) is 8%, and the project is of average risk.
What is the dollar-denominated net present value (NPV) of this project?
$642,597
$811,702
$777,881
$676,418
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.
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.
Use transfer pricing so that the subsidiary company pays maximum taxes to the foreign government.
Partner with local companies to get access to local financing.
Block the amount of cash flow coming from the subsidiary firm to the parent company.
Transcribed Image Text:9. International capital budgeting
Aa Aa
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 local vendor at a very low cost so that there is more profit left to repatriate
The parent company at a high cost so that there is less profit left to repatriate
The parent company at a very
cost so that ther
is more profit left to repatriate
Consider this case:
Sacramone Products Co. is a U.S. firm evaluating a project in Australia. You have the following information about the
project:
The project requires an investment of AU$800,000 today and is expected to generate cash flows
of AU$900,000 at the end of each of the next two years.
The current exchange rate of the U.S. dollar against the Australian dollar is $0.7755 per
Australian dollar (AU$).
The one-year forward exchange rate is $0.8022 / AU$, and the two-year forward exchange rate
is $0.8143 / AU$.
The firm's weighted average cost of capital (WACC) is 8%, and the project is of average risk.
What is the dollar-denominated net present value (NPV) of this project?
$642,597
$811,702
+777 001
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