to answer all these questions, you may need to use International
Financial Management, 12th edition
Jeff Madura
chapter_14.docxChapter 14
Chapter Questions
1. MNC Parent’s Perspective. Why should capital budgeting for subsidiary projects be assessed
from the parent’s perspective? What additional factors that normally are not relevant for a purely
domestic project deserve consideration in multinational capital budgeting?
2. Accounting for Risk. What is the limitation of using point estimates of exchange rates in the
capital budgeting analysis?
List the various techniques for adjusting risk in multinational capital budgeting. Describe any
advantages or disadvantages of each technique.
Explain how simulation can be used in multinational capital budgeting. What can it do that other
risk adjustment techniques cannot?
3. Uncertainty of Cash Flows. Using the capital budgeting framework discussed in this chapter,
explain the sources of uncertainty surrounding a proposed project in Hungary by a U.S. firm. In
what ways is the estimated net present value of this project more uncertain than that of a similar
project in a more developed European country?
4. Accounting for Risk. Your employees have estimated the net present value of project X to be
$1.2 million. Their report says that they have not accounted for risk, but that with such a large
NPV, the project should be accepted since even a risk-adjusted NPV would likely be positive. You
have the final decision as to whether to accept or reject the project. What is your decision?
5. Impact of Exchange Rates on NPV. Describe in general terms how future appreciation of the
euro will likely affect the value (from the parent’s perspective) of a project established in
Germany today by a U.S.-based MNC. Will the sensitivity of the project value be affected by the
percentage of earnings remitted to the parent each year?
6. Impact of Financing on NPV. Explain how the financing decision can influence the sensitivity of
the net present value to exchange rate forecasts.
7. September 11 Effects on NPV. In August 2001, Woodsen Inc. of Pittsburgh, PA considered the
development of a large subsidiary in Greece. In response to the September 11, 2001 terrorist attack
Chapter 14: Multinational Capital Budgeting
on the U.S., its expected cash flows and earnings from this acquisition were reduced only slightly.
Yet, the firm decided to retract its offer because of an increase in its required rate of return on the
project, which caused the NPV to be negative. Explain why the required rate of return on its
project may have increased after the attack.
8. Assessing a Foreign Project. Huskie Industries, a U.S.-based MNC, considers purchasing a small
manufacturing company in France that sells products only within France. Huskie has no other
existing business in France and no cash flows in euros. Would the proposed acquisition likely be
more feasible if the euro is expected to appreciate or depreciate over the long run? Explain.
9. Relevant Cash Flows in Disney’s French Theme Park. When Walt Disney World considered
establishing a theme park in France, were the forecasted revenues and costs associated with the
French park sufficient to assess the feasibility of this project? Were there any other “relevant cash
flows” that deserved to be considered?
10. Capital Budgeting Logic. Athens, Inc. established a subsidiary in the United Kingdom that was
independent of its operations in the United States. The subsidiary’s performance was well above
what was expected. Consequently, when a British firm approached Athens about the possibility of
acquiring the subsidiary, Athens’ chief financial officer implied that the subsidiary was
performing so well that it was not for sale. Comment on this strategy.
11. Capital Budgeting Logic. Lehigh Co. established a subsidiary in Switzerland that was performing
below the cash flow projections developed before the subsidiary was established. Lehigh
anticipated that future cash flows would also be lower than the original cash flow projections.
Consequently, Lehigh decided to inform several potential acquiring firms of its plan to sell the
subsidiary. Lehigh then received a few bids. Even the highest bid was very low, but Lehigh
accepted the offer. It justified its decision by stating that any existing project whose cash flows are
not sufficient to recover the initial investment should be divested. Comment on this statement.
12. Impact of Reinvested Foreign Earnings on NPV. Flagstaff Corp. is a U.S.-based firm with a
subsidiary in Mexico. It plans to reinvest its earnings in Mexican government securities for the
next 10 years since the interest rate earned on these securities is so high. Then, after 10 years, it
will remit all accumulated earnings to the United States. What is a drawback of using this
approach? (Assume the securities have no default or interest rate risk.)

Purchase answer to see full

Why Choose Us

  • 100% non-plagiarized Papers
  • 24/7 /365 Service Available
  • Affordable Prices
  • Any Paper, Urgency, and Subject
  • Will complete your papers in 6 hours
  • On-time Delivery
  • Money-back and Privacy guarantees
  • Unlimited Amendments upon request
  • Satisfaction guarantee

How it Works

  • Click on the “Place Order” tab at the top menu or “Order Now” icon at the bottom and a new page will appear with an order form to be filled.
  • Fill in your paper’s requirements in the "PAPER DETAILS" section.
  • Fill in your paper’s academic level, deadline, and the required number of pages from the drop-down menus.
  • Click “CREATE ACCOUNT & SIGN IN” to enter your registration details and get an account with us for record-keeping and then, click on “PROCEED TO CHECKOUT” at the bottom of the page.
  • From there, the payment sections will show, follow the guided payment process and your order will be available for our writing team to work on it.