《国际财务管理》（英文版） Chap17 International Capital Budgeting

Chapter International Seventeen 17 Capital budgeting Chapter objective This chapter discusses the methodology that a multinational firm can use to analyze the investment of capital in a foreign country

INTERNATIONAL FINANCIAL MANAGEMENT EUN / RESNICK Second Edition 17 Chapter International Seventeen Capital Budgeting Chapter Objective: This chapter discusses the methodology that a multinational firm can use to analyze the investment of capital in a foreign country

Chapter Outline Review of domestic Capital Budgeting o The Adjusted Present Value Model o Capital budgeting from the parent Firms Perspective e Risk adjustment in the capital budgeting process ● Sensitivity analysis ● Real options McGraw-Hilylrwoin 17-1 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 17-1 Chapter Outline ⚫ Review of Domestic Capital Budgeting ⚫ The Adjusted Present Value Model ⚫ Capital Budgeting from the Parent Firm’s Perspective ⚫ Risk Adjustment in the Capital Budgeting Process ⚫ Sensitivity Analysis ⚫ Real Options

Review of Domestic Capital Budgeting Identify the size and TIMING of all relevant cash flows on a time line 2. Identify the risKinesS of the cash flows to determine the appropriate discount rate 3. Find NPv by discounting the cash flows at the appropriate discount rate 4. Compare the value of competing cash flow streams at the same point in time McGraw-Hilylrwoin 17-2 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 17-2 1. Identify the SIZE and TIMING of all relevant cash flows on a time line. 2. Identify the RISKINESS of the cash flows to determine the appropriate discount rate. 3. Find NPV by discounting the cash flows at the appropriate discount rate. 4. Compare the value of competing cash flow streams at the same point in time. Review of Domestic Capital Budgeting

Review of Domestic Capital Budgeting The basic net present value equation is NP=∑ CE (1+K)(1+K)0 Where CF=expected incremental after-tax cash flow in year t TV=expected after tax cash flow in year T, including return of net working capital Co=initial investment at inception, K= weighted average cost of capital T=economic life of the project in years McGraw-Hilylrwoin 17-3 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 17-3 Review of Domestic Capital Budgeting The basic net present value equation is 0 1 (1 ) (1 ) C K TV K CF NPV T T T t t t − + + + = = Where: CFt = expected incremental after-tax cash flow in year t, TVT = expected after tax cash flow in year T, including return of net working capital, C0 = initial investment at inception, K = weighted average cost of capital. T = economic life of the project in years

Review of Domestic Capital Budgeting The NPV rule is to accept a project if NPv>0 CE NPv C≥0 台(1+K)(1+K) and to reject a project if NPV<o NP=∑xm+ Cn≤0 +K)(1+K McGraw-Hilylrwoin 174 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 17-4 Review of Domestic Capital Budgeting The NPV rule is to accept a project if NPV  0 0 (1 ) (1 ) 0 1 −  + + + = = C K TV K CF NPV T T T t t t and to reject a project if NPV  0 0. (1 ) (1 ) 0 1 −  + + + = = C K TV K CF NPV T T T t t t

Review of Domestic Capital Budgeting For our purposes it is necessary to expand the NPv equation CF=(R-0C1-D-l,)(1-x)+D1+l1(1-x) R, is incremental revenue I, is incremental interest expense Ct is incremental operating t is the marginal tax rate cash flow D, is incremental depreciation McGraw-Hilylrwoin 17-5 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 17-5 Review of Domestic Capital Budgeting For our purposes it is necessary to expand the NPV equation. CF (R OC D I )(1 τ) D I (1 τ) t = t − t − t − t − + t + t − Rt is incremental revenue Ct is incremental operating cash flow Dt is incremental depreciation It is incremental interest expense  is the marginal tax rate

Review of Domestic Capital Budgeting For our purposes it is necessary to expand the NPV equation CF=(R-0C1-D-l,)(1-x)+D1+l1(1-x) (M1+D2+1(1-τ (R-OC - D(1-T)+D NO1(1-)+D =(R-OC1)(1-)+D =OCF(1-)+D McGraw-Hilylrwoin 17-6 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 17-6 Review of Domestic Capital Budgeting For our purposes it is necessary to expand the NPV equation. CF (R OC D I )(1 τ) D I (1 τ) t = t − t − t − t − + t + t − (NI D I (1 τ) = t + t + t − t t Dt = (R −OC − Dτ)(1− τ) + t Dt = NOI (1− τ) + t t t = (R −OC )(1− τ) + τD t t = OCF (1− τ) + τD

Review of Domestic Capital Budgeting We can use CE=OCF d-t)+D to restate the NPv equation NPV= y CE 台(1+K)(1+K) as Npy ∑ OCF(1-t)+D TV (1+K) (1+k)>-C McGraw-Hilylrwoin 17-7 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 17-7 Review of Domestic Capital Budgeting We can use t t t CF = OCF (1− τ) + τD 0 1 (1 ) (1 ) C K TV K CF NPV T T T t t t − + + + = = to restate the NPV equation 0 1 (1 ) (1 ) (1 ) C K TV K OCF τ τD NPV T T T t t t t − + + + − + = = as:

The Adjusted Present value Model NPV ∑ OCF (I-r) D, +TV1 (1+K) (1+K)(1+kO Can be converted to adjusted present value(aPv) APy OCF(1-t) TD H(1+k21)(1+i)(1+1)(1+Kn 0 By appealing to Modigliani and Miller's results McGraw-Hilylrwoin 17-8 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 17-8 The Adjusted Present Value Model Can be converted to adjusted present value (APV) 0 1 (1 ) (1 ) (1 ) (1 ) C K TV K τD K OCF τ NPV T T t t T t t t − + + + + + − = = By appealing to Modigliani and Miller’s results. 0 1 (1 ) (1 ) (1 ) (1 ) (1 ) C K TV i τI i τD K OCF τ APV T u T t t t t T t t u t − + + + + + + + − ==

The Adjusted Present value Model APV=X OCF(1-τ),UD (1+K2)(1+i)(1+)(1+K) 0 The APV model is a value additivity approach to capital budgeting. Each cash flow that is a source of value to the firm is considered individuall note that with the apv model each cash flow is discounted at a rate that is appropriate to the riskiness of the cash flow McGraw-Hilylrwoin 17-9 Copyright@ 2001 by The McGraw-Hill Companies, Inc. All rights

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 17-9 The Adjusted Present Value Model The APV model is a value additivity approach to capital budgeting. Each cash flow that is a source of value to the firm is considered individually. Note that with the APV model, each cash flow is discounted at a rate that is appropriate to the riskiness of the cash flow. 0 1 (1 ) (1 ) (1 ) (1 ) (1 ) C K TV i τI i τD K OCF τ APV T u T t t t t T t t u t − + + + + + + + − ==