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International Capital Budgeting

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Examine the conditions under which the capital expenditure of a foreign subsidiary might have a
positive net present value (NPV) in total currency terms but be unprofitable from the parent
firm’s perspective. Create a (very) brief scenario that illustrates the conditions. Analyze the
adjusted present value (APV) methodology and make at least one recommendation for
improvement. Explain your rationale.
If the capital investment is by the parent firm is made within their country of operation,
there may be a likely hood that currency may appreciate during the duration of the project in
question. Another scenario would include the parent firm geographical location may also have a
higher tax rate than that of the subsidiary operations as well as repatriate due to remittance
restrictions would be factors that create a positive Net Present Value. One recommendation that
can be considered is the “leverage” that is or can be calculated by the parent firm. For example,
the parent firm may find that risk, taxes and agency expense and cost, can sometimes increase
firm value. Calculating for the future expected exchange rate is an additional method that parent
firms may increase their NPV by leveraging all subsidiaries AVP and calculated country taxes
including long term associated risk. Perhaps performing the evaluation functions through the use
of WACC, CCF, and APV would increase the total value of the organization in question
(Bienfait, 2014).
Reference
Bienfait, F. (2014, May 31st). International Finance ManagementA Note on Valuation Models:
CCFs vs. APV vs WACC. Retrieved from Harvard Business School :
http://people.hbs.edu/mdesai/ifm05/bienfait.pdf

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Examine the conditions under which the capital expenditure of a foreign subsidiary might have a positive net present value (NPV) in total currency terms but be unprofitable from the parent firm's perspective. Create a (very) brief scenario that illustrates the conditions. Analyze the adjusted presen ...
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