How do international factors affect decision making? Although the same basic principles of capital budgeting apply to both foreign and domestic operations, there are some key differences. For example, cash flows must be converted into the parent company’s currency, so they are subject to exchange rate risk. In addition, the cost of capital may be different for a foreign project compared with an equivalent domestic project.
For this Assignment, complete Problem 19-17, Parts a, b, and c on page 680 of your course text. This case examines the effects of exchange rates on net present values and rates of return.
In addition to solving for the rates of return from the U.S. and Swiss points of view, write a summary of your key learning points from this case. Be sure to include your calculations as an appendix. (Embed the Excel file as an Appendix).
19-17: FOREIGN CAPITAL BUDGETING Solitaire Machinery is a Swiss multinational manufacturing company. Currently, Solitaire’s financial planners are considering undertaking a 1-year project in the United States. The project’s expected dollar-denominated cash flows consist of an initial investment of $1,000 and a cash inflow the following year of $1,200. Solitaire estimates that its risk-adjusted cost of capital is 12%. Currently, 1 U.S. dollar will buy 0.90 Swiss franc. In addition, 1-year risk-free securities in the United States are yielding 5%, while similar securities in Switzerland are yielding 3.25%.
- If this project was instead undertaken by a similar U.S.-based company with the same risk-adjusted cost of capital, what would be the net present value and rate of return generated by this project?
- What is the expected forward exchange rate 1 year from now?
- If Solitaire undertakes the project, what is the net present value and rate of return of the project for Solitaire?
Resources
Brigham, E. F. , & Houston, J. F. (2016). Fundamentals of financial management (14th ed.). Boston, MA: Cengage Learning.
Chapter 19, “Multinational Financial Management” (pp. 648-677)
In Chapter 19, the authors explain the key differences between multinational and domestic corporations, as well as the impact these differences have on the financial management of multinational businesses.
Javidan, M., Teagarden, M., & Bowen, D. (2010). Making it overseas. Harvard Business Review, 88, 109–113. Retrieved from https://cb.hbsp.harvard.edu/cbmp/pl/58474698/58474960/0ed1310a995b078a931e7ccbccd5cf8b
This article presents two scenarios in which executives are employed overseas and focuses on the characteristics and skills needed to be an effective manager in a foreign country.
Moeller, M., Harvey, M., Griffith, D., & Richey, G. (2013). The impact of country-of-origin on the acceptance of foreign subsidiaries in host countries: An examination of the ‘liability-of-foreignness.’ International Business Review, 22, 89–99.
This article examines the relationship between an organization’s country-of-origin and acceptance into a host country environment by constituents, such as vendors, suppliers, and distributors. It points out that management must note the potential resistance to accept the organization and its products/services and that management must develop a proactive set of strategies to address the negativism of the host country constituents.
Quer, D., Claver, E., & Rienda, L. (2012). Political risk, cultural distance, and outward foreign direct investment: Empirical evidence from large Chinese firms. Asia Pacific Journal of Management, 29(4), 1089–1104. doi: http://dx.doi.org/10.1007/s10490-011-9247-7
