Capital budgeting analysis is important for both domestic firms and MNCs. The goal is the same: to maximize shareholder wealth. Capital investments with positive NPV contribute to shareholder wealth. Additionally, capital investments generally represent large expenditures relative to the value of the entire firm. These investments determine how efficiently and expensively the firm will produce its product. Consequently, capital expenditures determine the long-run competitive position of the firm in the product marketplace. In this assignment, you will research capital budgeting in the international setting.
In Part 1, explore the challenges MNCs face with international capital budgeting. Research the following and compose an essay:
What is the difference between performing the capital budgeting analysis from the parent firm’s perspective as opposed to from the subsidiary’s perspective?
Explain real options and why and how the MNCs utilize them.
What are the conditions under which the capital expenditure of a foreign subsidiary may have a positive NPV impact based on local currency but be unprofitable from the parent MNC’s perspective? What should the parent MNC do in such instances?
In Part 2, answer the questions in the following case study.
Ford plans to construct a manufacturing plant in China. The construction costs 9 billion Chinese Yuan. Ford expects to leave the plant running for three years. During the three years of operation, Yuan cash flows (CF) are expected to be 3 billion Yuan, 3 billion Yuan, and 2 billion you, respectively. Operating cash flows will begin one year from today and are remitted back to the parent at the end of each year. At the end of the third year, Ford expects to sell the plant for 5 billion Yuan. Ford has a required rate of return of 17.7 percent. It currently takes 6.27 Yuan to buy one U.S. dollar, and Yuan is expected to depreciate by 5 percent per year.
Find the NPV for the project (show your calculations in your answer). Should Ford build the plant? Explain.
How would your answer change if the value of the Yuan was expected to remain unchanged from its current value of 6.27 per U.S. dollar over the course of the three years? Should Ford construct the plant then?
Your submission should be at least four pages total for both parts, plus a reference page for Part 1 in Microsoft Word, APA formatted, and with correct grammar.
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