MULTINATIONAL

CAPITAL BUDGETING
CHAPTER 14
 GROUP I

• Zohaib Ahmed Sheikh

• Shahid Mehmood
• Rimsha Waqar
• Haleema Qureshi
 TOPIC FOR GROUP

Factors That Affect Differences In

Cash Flows
 INTRODUCTION TO
MULTINATIONAL CAPITAL
BUDGETING
Evaluation of projects by MNCs
Compares the benefits and costs of the
projects
Comparing present values of future cash
flows to initial investments
 “MULTINATIONAL CAPITAL
BUDGETING”
A CRITICAL FUNCTION?
• Special circumstances of international projects
make multinational capital budgeting more
complex than domestic one.
• Irreversible projects
• cannot be sold easily at reasonable price
 SUBSIDIARY VERSUS PARENT
PERSPECTIVE
• Multinational Capital Budgeting should be
based on Parent perspective
• Feasibility of projects for Subsidiary, not for
Parent
• Difference in Net After Tax Cash Inflows due to
some factors
 FACTORS THAT AFFECT
DIFFERENCES IN CASH FLOWS

• Tax differentials
• Restrictions on remitted earnings
• Exchange rate movements
• Summary of factors
 TAX DIFFERENTIALS
• Earnings remitted to parent company
• Example: Parent’s Government tax on remitted earnings. If
government will charge high tax rates on remitted funds. The
amount earned by the parent company will be less.
• Feasibility of project for subsidiary, not for parent
 RESTRICTIONS ON REMITTED
EARNINGS
• Government Restrictions on remitted earnings
by subsidiaries
• Example: Consider a potential project to be implemented
in a country where host government restrictions require that
a percentage of the subsidiary earnings remain in the
country. Then the parent may never have access to these
funds.
• Attractive for subsidiary company, not for
parent
EXCHANGE RATE MOVEMENTS
• Earnings remitted to parent company
• Earnings influenced by exchange rates
• Example: When the earnings from subsidiary will be remitted to
parent. The earnings will be converted into the currency of parent
country, on which certain exchange rate will be charged. If the
exchange rates are high they will decrease the amount remitted

• Project feasible for subsidiary, not for parent

SUMMARY OF FACTORS
 EXCEPTION TO THE RULE OF
PARENT’S PERSPECTIVE
• Foreign subsidiary not wholly owned by parent
• Project partially financed by parent and subsidiary
• Group of shareholders
• Arrangement enhances the value of both
• Decisions made in the interest of both