M19_MOFF_549181_03_PP_C19

Chapter 19
Multinational Capital Budgeting
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Multinational Capital Budgeting: Learning Objectives
• For export costs, loading costs of $2.00/tonne and shipping costs of $10/tonne must also be added
Copyright © 2009 Pearson Prentice Hall. All rights reserved.
Copyright © 2009 Pearson Prentice Hall. All rights reserved.
19-10
Exhibit 19.2 Investment and Financing of the Semen Indonesia Project (all values in 000s unless otherwise noted)
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Illustration: Cemex Goes Abroad
• Financial assumptions
– Capital Investment – cost to build plant estimated at $150/tonne but Cemex believes it can build the plant at a cost of $110/tonne
– Parent cash flows must be distinguished from project – Parent cash flows often depend on the form of financing, thus cannot clearly separate cash flows from financing – Additional cash flows from new investment may in part or in whole take away from another subsidiary; thus as stand alone may provide cash flows but overall adds no value to entire organization – Parent must recognize remittances from foreign investment because of differing tax systems, legal and political constraints
Copyright © 2009 Pearson Prentice Hall. All rights reserved.
19-2
Multinational Capital Budgeting
• Like domestic capital budgeting, this focuses on the cash inflows and outflows associated with prospective long-term investment projects • Capital budgeting follows same framework as domestic budgeting
Copyright © 2009 Pearson Prentice Hall. All rights reserved.
19-9
Illustration: Cemex Goes Abroad
• Financial assumptions
– Financing – plant would be financed with 50% equity (all from Cemex) and 50% debt
• Assuming exchange rate of Rp10,000/$ and a 20 year life, cost is estimated at Rp22 trillion • With straight line depreciation on equipment values at Rp17.6 trillion costing 1.76 trillion per year
– Identify initial capital invested or put at risk – Estimate cash inflows, including a terminal value or salvage value of investment – Identify appropriate discount rate for PV calculation – Apply traditional NPV or IRR analysis
• Extend the domestic capital budgeting analysis to evaluate a Greenfield foreign project • Distinguish between the project viewpoint & the parent viewpoint when analyzing a potential foreign investment • Adjust the capital budgeting analysis of a foreign project for risk • Introduce the use of real option analysis as a complement to DCF analysis in the evaluation of potential international investments
• Debt is broken down, with Cemex providing 75% and a bank consortium providing the rห้องสมุดไป่ตู้maining 25% • Cemex’s WACC (in US dollars) is 11.98% • For the local project (in rupiah) the WACC is 33.257%
• Cement will be sold in export market at $58/tonne
– Costs – cost per ton is estimated at Rp115,000 in 1999 and rising at the rate of inflation (30%) per year
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19-3
Complexities of Budgeting for a Foreign Project
• Several factors make budgeting for a foreign project more complex
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19-5
Project versus Parent Valuation
• Most firms evaluate foreign projects from both parent and project viewpoints
Copyright © 2009 Pearson Prentice Hall. All rights reserved.
19-11
Illustration: Cemex Goes Abroad
• Financial assumptions
– Revenues – sales are based on export and the plant will operate at 40% capacity producing 8 million tonnes per year
Copyright © 2009 Pearson Prentice Hall. All rights reserved.
19-6
Illustration: Cemex Goes Abroad
• Cementos Mexicanos (Cemex) is considering construction of plant in Indonesia (Semen Indonesia) as a Greenfield project • Cemex is listed on both US and Mexican markets but most of its capital is US dollar denominated so evaluation of project is in US dollars
Copyright © 2009 Pearson Prentice Hall. All rights reserved.
19-4
Complexities of Budgeting for a Foreign Project
– An array of non-financial payments can generate cash flows to parent in form of licensing fees, royalty payments, etc. – Managers must anticipate differing rates of national inflation which can affect differing cash flows – Use of segmented national capital markets may create opportunity for financial gain or additional costs – Use of host government subsidies complicates capital structure and parent’s ability to determine appropriate WACC – Managers must evaluate political risk – Terminal value is more difficult to estimate because potential purchasers have widely divergent views