Capital budgeting & Multinational Capital Budgeting
• Capital Budgeting may be defined as the decision making process by which firms evaluate the
purchase of major fixed assets including premises, machinery and equipment.
• Capital budgeting is the process of identifying, evaluating, and implementing a firm’s investment
opportunities.
• Multinational capital budgeting, like traditional domestic capital budgeting, focuses on the cash
inflows and outflows associated with prospective long-term (foreign) investment projects. Multinational
capital budgeting has the same theoretical framework as domestic capital budgeting
Five Steps Involved In The Capital Budgeting Process
01. Proposal generation
Proposal generation is the origination of proposed capital projects for the firm by individuals at various
levels of the organization.
02. Review and analysis
Review and analysis is the formal process of assessing the appropriateness and economic viability of the
project in light of the firm's overall objectives. This is done by developing cash flows relevant to the
project and evaluating them through capital budgeting techniques. Risk factors are also incorporated
into the analysis phase.
03. Decision making
Decision making is the step where the proposal is compared against predetermined criteria and either
accepted or rejected.
04.Implementation
Implementation of the project begins after the project has been accepted and funding is made available.
05. Follow-up
Follow-up is the post-implementation audit of expected and actual costs and revenues generated from
the project to determine if the return on the proposal meets pre-implementation projections.
Key Motives for Making Capital Expenditures
Expansion: The most common motive for a capital expenditure is to expand the level of operations—
usually through acquisition of fixed assets. A growing firm often needs to acquire new fixed assets
rapidly, as in the purchase of property and plant facilities.
Replacement: As a firm’s growth slows and it reaches maturity, most capital expenditures will be made
to replace or renew obsolete or worn-out assets. Each time a machine requires a major repair, the
outlay for the repair should be compared to the outlay to replace the machine and the benefits of
replacement.
, Renewal: Renewal, an alternative to replacement, may involve rebuilding, overhauling, or a physical
facility could be renewed by rewiring and adding air conditioning. To improve efficiency, both
replacement and renewal of existing machinery may be suitable solutions. These expenditures include
outlays for advertising, research and development, management consulting, and new products.
Other capital expenditure proposals—such as the installation of pollution-control and safety devices
mandated by the government—are difficult to evaluate because they provide intangible returns rather
than clearly measurable cash flows.
Subsidiary versus Parent Perspective
Should the capital budgeting for a multi-national project be conducted from the viewpoint of the
subsidiary that will administer the project, or the parent that will provide most of the financing?
The results may vary with the perspective taken because the net after-tax cash inflows to the parent can
differ substantially from those to the subsidiary.
A parent’s perspective is appropriate when evaluating a project, since any project that can create a
positive net present value for the parent should enhance the firm’s value.
However, one exception to this rule may occur when the foreign subsidiary is not wholly owned by the
parent.
Subsidiary versus Parent Perspective
The difference in cash inflows is due to :
• Tax differentials
– What is the tax rate on remitted funds?
• Regulations that restrict remittances
• Excessive remittances
– The parent may charge its subsidiary very high administrative fees.
• Exchange rate movements
Input for Multinational Capital Budgeting
1. Initial investment
2. Consumer demand
3. Product price
4. Variable cost
• Capital Budgeting may be defined as the decision making process by which firms evaluate the
purchase of major fixed assets including premises, machinery and equipment.
• Capital budgeting is the process of identifying, evaluating, and implementing a firm’s investment
opportunities.
• Multinational capital budgeting, like traditional domestic capital budgeting, focuses on the cash
inflows and outflows associated with prospective long-term (foreign) investment projects. Multinational
capital budgeting has the same theoretical framework as domestic capital budgeting
Five Steps Involved In The Capital Budgeting Process
01. Proposal generation
Proposal generation is the origination of proposed capital projects for the firm by individuals at various
levels of the organization.
02. Review and analysis
Review and analysis is the formal process of assessing the appropriateness and economic viability of the
project in light of the firm's overall objectives. This is done by developing cash flows relevant to the
project and evaluating them through capital budgeting techniques. Risk factors are also incorporated
into the analysis phase.
03. Decision making
Decision making is the step where the proposal is compared against predetermined criteria and either
accepted or rejected.
04.Implementation
Implementation of the project begins after the project has been accepted and funding is made available.
05. Follow-up
Follow-up is the post-implementation audit of expected and actual costs and revenues generated from
the project to determine if the return on the proposal meets pre-implementation projections.
Key Motives for Making Capital Expenditures
Expansion: The most common motive for a capital expenditure is to expand the level of operations—
usually through acquisition of fixed assets. A growing firm often needs to acquire new fixed assets
rapidly, as in the purchase of property and plant facilities.
Replacement: As a firm’s growth slows and it reaches maturity, most capital expenditures will be made
to replace or renew obsolete or worn-out assets. Each time a machine requires a major repair, the
outlay for the repair should be compared to the outlay to replace the machine and the benefits of
replacement.
, Renewal: Renewal, an alternative to replacement, may involve rebuilding, overhauling, or a physical
facility could be renewed by rewiring and adding air conditioning. To improve efficiency, both
replacement and renewal of existing machinery may be suitable solutions. These expenditures include
outlays for advertising, research and development, management consulting, and new products.
Other capital expenditure proposals—such as the installation of pollution-control and safety devices
mandated by the government—are difficult to evaluate because they provide intangible returns rather
than clearly measurable cash flows.
Subsidiary versus Parent Perspective
Should the capital budgeting for a multi-national project be conducted from the viewpoint of the
subsidiary that will administer the project, or the parent that will provide most of the financing?
The results may vary with the perspective taken because the net after-tax cash inflows to the parent can
differ substantially from those to the subsidiary.
A parent’s perspective is appropriate when evaluating a project, since any project that can create a
positive net present value for the parent should enhance the firm’s value.
However, one exception to this rule may occur when the foreign subsidiary is not wholly owned by the
parent.
Subsidiary versus Parent Perspective
The difference in cash inflows is due to :
• Tax differentials
– What is the tax rate on remitted funds?
• Regulations that restrict remittances
• Excessive remittances
– The parent may charge its subsidiary very high administrative fees.
• Exchange rate movements
Input for Multinational Capital Budgeting
1. Initial investment
2. Consumer demand
3. Product price
4. Variable cost
