additional topics in international capital budgeting

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1、ChapterChapter1616AdditionalTopicsinInternationalCapitalBudgetingSiemens,theGermancompanyknownforitsexpertiseinelectricalengineeringandelectron-ics,has277,000employeesoutsideofGermany.IfitsBraziliansubsidiarywouldliketoexpanditsoperationsinanticipationofgrowththroug

2、houtLatinAmerica,someoneinGermanheadquartersmustdecidewhethertheprojectedbenefitsoutweighthecosts.WilltheanalysisbedoneineurosorBrazilianreals?Willitmatter?Thischapteraddressessuchquestions.Internationalcapitalbudgetingcanbedoneintwobasicways:eitherbyforecastingfutu

3、reforeigncurrencycashflowsandthendiscountingthemwithaforeigncurrencydis-countrateorbyconvertingtheforeigncurrencycashflowsintoforecastsdenominatedinthedomesticcurrencyandthendiscountingthemwithadomesticcurrencydiscountrate.Thetwovaluesshouldbethesamewhenexpressedina

4、commoncurrency.However,thatdoesn’talwayshappeninpracticeunlessthetwomethodsareusedwiththesameimplicitassump-tions.Thechapterconsidersaninternationalcapitalbudgetingcasethatdemonstrateshoweasyitistogetdifferentvalueswiththetwomethodsfordiscountingforeigncurrencycashf

5、lowsandwhatassumptionsarerequiredtoensurethatthemethodsareequivalent.ThischapteralsodiscussesseveralimportanttopicsthatextendandcomplementthebasicinternationalcapitalbudgetinganalysispresentedinChapter15.Inthatchapter,wedevelopedaframeworkforinternationalcapitalbudg

6、etingusingadjustednetpresentvalue(ANPV)analysis.Inthischapter,weconsidertwoalternativeapproaches.First,wediscusshowtovalueaprojectusingtheweightedaveragecostofcapital(WACC)approachtocapi-talbudgeting.Then,weexaminetheflow-to-equity(FTE)approachtocapitalbudgeting,whi

7、chisathirdwayofvaluingprojects.WediscusssituationsinwhichfirmsmightprefertouseWACCorFTE,weexplorethelimitationsofthedifferentapproaches,andwedeterminewhenaWACCoranFTEanalysisisequivalenttoanANPVanalysis.Itiswellknownthatvaluationsoftenhingeonassumptionsaboutterminal

8、values.Weexaminewhathappensifweassumethatcurrentexpansionofthefirmandfuturecompeti-tiondrivethereturnoninvestmentequaltothecostofcapitalin