Deck 14: Multinational Capital Budgeting

Question 1

When evaluating international project cash flows, which of the following factors is relevant?​

A)future inflation
B)blocked funds
C)exchange rates
D)all of the above

Answer 1

D

Question 2

Blocked funds may penalize a project if the return on the forced reinvestment in the foreign country is less than the required rate of return on the project.

Answer 2

True

Question 3

In capital budgeting analysis, the use of a cumulative NPV is useful for:​

A)determining a probability distribution of NPVs.
B)determining the time required to achieve a positive NPV.
C)determining how the required rate of return changes over time.
D)determining how the cost of capital changes over time.
E)A and B

Answer 3

B

Question 4

When assessing a German project administered by a German subsidiary of a U.S.-based MNC solely from the German subsidiary's perspective, which variable will most likely influence the capital budgeting analysis?​

A)the withholding tax rate
B)the euro's exchange rate
C)the U.S. tax rate on earnings remitted to the United States
D)the German government's tax rate
E)A and C

Question 5

If a multinational project is assessed from the subsidiary's perspective, withholding taxes are ignored for project assessment.

Question 6

An MNC is considering establishing a two-year project in New Zealand with a $30 million initial investment. The firm's cost of capital is 12 percent. The required rate of return on this project is 18 percent. The project is expected to generate cash flows of NZ$12 million in Year 1 and NZ$30 million in Year 2, excluding the salvage value. Assume no taxes and a stable exchange rate of $.60 per NZ$ over the next two years. All cash flows are remitted to the parent. What is the break-even salvage value?​

A)about NZ$11 million
B)about NZ$15 million
C)about NZ$31 million
D)about NZ$37 million
E)about NZ$25 million

Question 7

Assume an MNC establishes a subsidiary in a country where it has no other existing business. The present value of parent cash flows from this subsidiary is more sensitive to exchange rate movements when:​

A)the subsidiary finances the entire investment by local borrowing.
B)the subsidiary finances most of the investment by local borrowing.
C)the parent finances most of the investment.
D)the parent finances the entire investment.

Question 8

If the parent charges the subsidiary administrative fees, the earnings from the project will appear low to the parent and high to the subsidiary.

Question 9

If a U.S. parent is setting up a French subsidiary, and funds from the subsidiary will be periodically sent to the parent, the ideal situation from the parent's perspective is a ____ aFter the subsidiary is established.

A)strengthening euro
B)stable euro
C)weak euro
D)B and C are both ideal.

Question 10

Assume the parent of a U.S.-based MNC plans to completely finance the establishment of its British subsidiary with existing funds from retained earnings from U.S. operations. According to the text, the discount rate used in the capital budgeting analysis on this project will be most affected by:​

A)the cost of borrowing funds in the United Kingdom.
B)the economic conditions in the United Kingdom.
C)the parent's cost of capital.
D)A and B

Question 11

Other things being equal, a blocked funds restriction is more likely to have a significant adverse effect on a project if the currency of that country is expected to ____ over time, and if the interest rate in that country is relatively ____.

A)appreciate; low
B)appreciate; high
C)depreciate; high
D)depreciate; low

Question 12

Assume a U.S.-based MNC has a Chilean subsidiary that annually remits 30 million Chilean pesos to the United States. If the peso ____, the dollar amount of remitted funds ____.

A)appreciates; decreases
B)depreciates; is unaffected
C)appreciates; is unaffected
D)depreciates; decreases
E)B and C

Question 13

Other things being equal, firms from a particular home country will engage in more international acquisitions if they expect foreign currencies to ____ against their home currency, and if their cost of capital is relatively ____.

A)appreciate; low
B)appreciate; high
C)depreciate; high
D)depreciate; low

Question 14

A firm considers an exporting project and will invoice the exports in dollars. Estimating the expected cash flows in dollars would be more difficult if the currency of the foreign country is ____.

A)fixed
B)volatile
C)stable
D)none of the above, as the firm is not exposed

Question 15

The impact of blocked funds on the net present value of a foreign project will be greater if interest rates are ____ in the host country and there are ____ investment opportunities in the host country.

A)very high; limited
B)very low; limited
C)very low; numerous
D)very high; numerous

Question 16

If an MNC exports to a country and then establishes a subsidiary to produce and sell the same product in that country, cash flows from existing operations would likely be ____ affected by the project. If an MNC establishes a foreign manufacturing subsidiary that buys components from the parent, the cash flows from existing operations would likely be ____ affected by the project.

A)adversely; adversely
B)favorably; adversely
C)favorably; favorably
D)adversely; favorably

Question 17

In general, increased investment by the parent in the foreign subsidiary causes more exchange rate exposure to the parent over time because the cash flows remitted to the parent will be larger.

Question 18

According to the text, in order to develop a distribution of possible net present values from international projects, a firm should use:

A)a risk-adjusted discount rate.
B)a payback period.
C)certainty equivalents.
D)simulation.

Question 19

The break-even salvage value of a particular project is the salvage value necessary to:​

A)offset any losses incurred by the subsidiary in a given year.
B)offset any losses incurred by the MNC overall in a given year.
C)make the project have zero profits.
D)achieve a zero net present value for the project.

Question 20

The discrepancy between the feasibility of a project in a host country from the perspective of the U.S. parent versus the subsidiary administering the project is likely to be greater for projects in countries where:​

A)the taxes are the same as in the United States.
B)there are no blocked fund restrictions.
C)the currency of the host country is expected to depreciate consistently.
D)none of the above; a discrepancy is not possible.

Question 21

If the parent's government imposes a ____ tax rate on funds remitted from a foreign subsidiary, a project is less likely to be feasible from the ____ point of view.

A)high; subsidiary's
B)high; parent's
C)low; parent's
D)A and C
E)none of the above

Question 22

Everything else being equal, the ____ the depreciation expense is in a given year, the ____ a foreign project's NPV will be.

A)higher; lower
B)higher; higher
C)lower; higher
D)none of the above

Question 23

Because before-tax cash flows are necessary for an adequate capital budgeting analysis, international tax effects need not be determined for a proposed foreign project.

A)True
B)False

Question 24

Like income tax treaties, ____ help to avoid double taxation and stimulate direct foreign investment.

A)withholding taxes
B)excise taxes
C)tax credits
D)carryforwards

Question 25

Which of the following is not a characteristic of a tax system that an MNC that would consider when conducting a tax assessment of a country?​

A)corporate income taxes
B)withholding taxes
C)provisions for carrybacks and carryforwards
D)tax treaties
E)all of the above are characteristics to be considered.

Question 26

A U.S.-based MNC has just established a subsidiary in Algeria. Shortly aFter the plant was built, the MNC determines that its exchange rate forecasts, which had previously indicated a slight appreciation in the Algerian dinar, were probably false. Instead of a slight appreciation, the MNC now expects that the dinar will depreciate substantially due to political turmoil in Algeria. This new development would likely cause the MNC to ____ its estimate of the previously computed net present value.

A)lower
B)increase
C)lower, but not necessarily if the MNC invests enough in Algeria to offset the decrease in NPV
D)increase, but not necessarily if the MNC reduces its investment in Algeria by an offsetting amount
E)none of the above

Question 27

A foreign project generates a negative cash flow in Year 1 and positive cash flows in Years 2 through 5. The NPV for this project will be higher if the foreign currency ____ in Year 1 and ____ in Years 2 through 5.

A)depreciates; depreciates
B)appreciates; appreciates
C)depreciates; appreciates
D)appreciates; depreciates

Question 28

Exhibit 14-1
Assume that Baps Corp. is considering the establishment of a subsidiary in Norway. The initial investment required by the parent is $5 million. If the project is undertaken, Baps would terminate the project aFter four years. Baps's cost of capital is 13 percent, and the project has the same risk as Baps's existing projects. All cash flows generated from the project will be remitted to the parent at the end of each year. Listed below are the estimated cash flows the Norwegian subsidiary will generate over the project's lifetime in Norwegian kroner (NOK):

Refer to Exhibit 14-1. What is the net present value of the Norwegian project?

A)-$803,848
B)$5,803,848
C)$1,048,829
D)none of the above

Question 29

The required rate of return of a project is ____ the MNC's cost of capital.

A)greater than
B)less than
C)the same as
D)any of the above, depending on the specific project

Question 30

When a foreign subsidiary is not wholly owned by the parent and a foreign project is partially financed with retained earnings of the parent and of the subsidiary, then:​

A)the parent's perspective should be used to evaluate a foreign project.
B)the subsidiary's perspective should be used to evaluate a foreign project.
C)the foreign project should enhance the value of both the parent and the subsidiary.
D)none of the above

Question 31

If a subsidiary project is assessed from the subsidiary's perspective, then an expected appreciation in the foreign currency will affect the feasibility of the project ____.

A)positively
B)negatively
C)either positively or negatively, depending on the percentage of appreciation
D)none of the above

Question 32

Holding other factors constant, an international project's NPV is ____ related to consumer demand and ____ related to the project's salvage value.

A)positively; positively
B)positively; negatively
C)negatively; positively
D)negatively; negatively

Question 33

A foreign project in Hungary and another in Japan had the same perceived value from the U.S. parent's perspective. Then, the exchange rate expectations were revised, upward for the value of the Hungarian forint and downward for the Japanese yen. The break-even salvage value for the project in Japan would now be ____ from the parent's perspective.

A)negative
B)higher than that for the Hungarian project
C)lower than that for the Hungarian project
D)the same as that for the Hungarian project
E)A and C

Question 34

Exhibit 14-1
Assume that Baps Corp. is considering the establishment of a subsidiary in Norway. The initial investment required by the parent is $5 million. If the project is undertaken, Baps would terminate the project aFter four years. Baps's cost of capital is 13 percent, and the project has the same risk as Baps's existing projects. All cash flows generated from the project will be remitted to the parent at the end of each year. Listed below are the estimated cash flows the Norwegian subsidiary will generate over the project's lifetime in Norwegian kroner (NOK):

Refer to Exhibit 14-1. Assume that NOK8,000,000 of the cash flow in Year 4 represents the salvage value. Baps is not completely certain that the salvage value will be this amount and wishes to determine the break-even salvage value, which is $____.

A)510,088.04
B)1,710,088
C)1,040,000
D)none of the above

Question 35

Holding other factors constant, an international project's NPV is ____ related to the size of the initial investment and ____ related to the project's required rate of return.

A)positively; positively
B)positively; negatively
C)negatively; positively
D)negatively; negatively

Question 36

Petrus Co. has a unique opportunity to invest in a two-year project in Australia. The project is expected to generate 1,000,000 Australian dollars (A$) in the first year and A$2,000,000 in the second. Petrus would have to invest $1,500,000 in the project. Petrus has determined that the cost of capital for similar projects is 14 percent. What is the net present value of this project if the spot rate of the Australian dollar for the two years is forecasted to be $.55 and $.60, respectively?​

A)$2,905,817
B)-$94,183
C)$916,128.
D)none of the above

Question 37

Which of the following is not a factor that should be considered in multinational capital budgeting?​

A)Blocked funds
B)Exchange rate fluctuations
C)Inflation
D)Financing arrangements
E)All of the above should be considered.

Question 38

The ____ is (are) likely the major source of funds to support a particular project.

A)initial investment
B)variable costs
C)fixed costs
D)none of the above

Question 39

When conducting a capital budgeting analysis and attempting to account for effects of exchange rate movements for a foreign project, inflation ____ included explicitly in the cash flow analysis, and debt payments by the subsidiary ____ included explicitly in the cash flow analysis.

A)should be; should be
B)should definitely not be; should definitely not be
C)should definitely not be; should be
D)should be; should definitely not be

Question 40

Exhibit 14-1
Assume that Baps Corp. is considering the establishment of a subsidiary in Norway. The initial investment required by the parent is $5 million. If the project is undertaken, Baps would terminate the project aFter four years. Baps's cost of capital is 13 percent, and the project has the same risk as Baps's existing projects. All cash flows generated from the project will be remitted to the parent at the end of each year. Listed below are the estimated cash flows the Norwegian subsidiary will generate over the project's lifetime in Norwegian kroner (NOK):

Refer to Exhibit 14-1. Baps is also uncertain regarding the cost of capital. Recently, Norway has experienced some political turmoil. What is the net present value (NPV) of this project if a 16 percent cost of capital is used instead of 13 percent?

A)-$17,602.62
B)$8,000,000
C)$1,048,829
D)$645,147

Question 41

Assuming that a subsidiary is wholly owned, the subsidiary's perspective is appropriate in attempting to determine whether a project will enhance the firm's value.

Question 42

The feasibility of a multinational project from the parent's perspective is dependent not on the subsidiary cash flows but on the cash flows that it ultimately receives.

Question 43

Fixed costs are expenses that are not affected by consumer demand, so they can be estimated without an estimate of that demand when doing multinational capital budgeting.

Question 44

If a foreign project is financed with a subsidiary's retained earnings, the subsidiary's investment could be viewed as an opportunity cost, since the funds could be remitted to the parent rather than invested in the foreign project.

Question 45

Three common methods to incorporate an adjustment for risk into the capital budgeting analysis are the use of risk-adjusted discount rates, sensitivity analysis, and simulation.

Question 46

If the parent's perspective is used in analyzing a multinational project, the relevant cash flows are the dollars ultimately received by the parent as a result of the project; the relevant initial outlay is the investment by the parent.

Question 47

____ can cause the parent's aFter-tax cash flows to differ from the subsidiary's aFter-tax cash flows.

A)The number of units sold by the subsidiary
B)The subsidiary's earnings before income and taxes (EBIT)
C)The tax rate the subsidiary is subject to in the host country
D)Withholding taxes imposed by the host government

Question 48

The greater the uncertainty about a project's forecasted cash flows, the larger should be the discount rate applied to cash flows, other things being equal.

Question 49

The objective of sensitivity analysis in capital budgeting is to determine how sensitive the NPV is to alternative values of the input variables.

Question 50

In multinational capital budgeting, depreciation is treated as a cash outflow.

Question 51

In conducting a multinational capital budgeting analysis, the subsidiary's perspective should always be used.

Question 52

____ is not a method of incorporating an adjustment for risk into the capital budgeting analysis.

A)Discriminant analysis
B)Risk-adjusted discount rate
C)Sensitivity analysis
D)Simulation

Question 53

Which of the following is not true regarding simulation?​

A)It can be used to generate a probability distribution of NPVs.
B)It generates a probability distribution of NPVs by randomly drawing values for the input variable(s).
C)It can only be used for one variable at a time.
D)It can be used to develop probability distributions of all variables with uncertain future values.

Question 54

If a host government restricts the remittances from a foreign subsidiary, a possible solution is to let the subsidiary obtain partial financing for the project.

Question 55

No matter what the probability distribution of future exchange rates is, as long as one out of several scenarios results in a negative net present value (NPV), a project should not be accepted.

Question 56

As the financing of a foreign project by the parent ____ relative to the financing provided by the subsidiary, the parent's exchange rate exposure ____.

A)increases; decreases
B)decreases; increases
C)increases; increases
D)none of the above

Question 57

Some capital budgeting projects contain real options in that they provide opportunities to obtain or eliminate specified real assets such as machinery or a manufacturing plant.

Question 58

The required rate of return used to discount the relevant cash flows from a foreign project may differ from the MNC's cost of capital because of that particular project's risk.

Question 59

Sometimes, a multinational project may appear feasible from the subsidiary's perspective but not from the parent's perspective and vice versa.

Question 60

If partial financing is provided by the foreign subsidiary, including foreign interest payments in the cash flow analysis may avoid overstatement of the estimated foreign cash flows.