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II. ISSUES IN FOREIGN INVESTMENT ANALYSIS

II. ISSUES IN FOREIGN INVESTMENT ANALYSIS

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ISSUES IN FOREIGN INVESTMENT

ANALYSIS

2.



Three Stage Approach

-to simplify project evaluation

a. compute subsidiary’s project

cash flows

b. evaluate the project to the

parent

c. incorporate the indirect effects

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ISSUES IN FOREIGN INVESTMENT

ANALYSIS

3. Estimating Incremental Project Flows

What is the true profitability of the

project?

a.

Adjust for tax effects of

1.) transfer pricing

2.) fees and royalties



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ISSUES IN FOREIGN INVESTMENT

ANALYSIS

4.



Tax Factors:

determine the amount and timing

of taxes paid on foreign-source

income.



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ISSUES IN FOREIGN INVESTMENT

ANALYSIS

B.

Issue #2 How to adjust for increased

economic and political risk of project? 1.

Three Methods of Economic

and

Political Risk Adjustments:

a. Shortening minimum payback

period

b. Raising required rate of return

c. Adjusting cash flows



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ISSUES IN FOREIGN INVESTMENT

ANALYSIS

2. Accounting for Exchange Rate and

Price Changes (inflationary)

Two stage procedure:

a.

Convert nominal foreign cash

flows into home currency terms

b.

Discount home currency flows

at domestic required rate of return.

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III. POLITICAL RISK ANALYSIS

I. POLITICAL RISK ANALYSIS

A. Political risks

can be incorporated into an NPV

analysis by

- adjusting expected project cash

flows to reflect the risks.



16



POLITICAL RISK ANALYSIS

B.



EXPROPRIATION

- the extreme form of political risk



C.



BLOCKED FUNDS



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IV. GROWTH OPTIONS AND

PROJECT EVALUATION

IV.



GROWTH OPTIONS AND PROJECT

EVALUATION

A. Options:

1.



an important component of

many investment decisions



2.



ignoring options will understate

the NPV of that investment

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GROWTH OPTIONS AND PROJECT

EVALUATION

B.

Project Evaluation

1.



Growth options require an

expanded NPV rule



2.



Investments in emerging markets

can be viewed as growth options



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II. ISSUES IN FOREIGN INVESTMENT ANALYSIS

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