1. Multinational
Capital
Budgeting
March 31, 2015
Junaid Mirza

2. Introduction
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3. Plan for the Workshop
• Basics of capital budgeting
• Issues in foreign investment analysis
• Growth options and project evaluation
• Case study
o Group work
o Group presentations
o Case study take-up
• Q&A
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4. Basics of Capital Budgeting
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5. Terms of Note
• Capital
• Capital budget
• Investment
• FDI
• Cash flows
• Operating cash flows
• Investing cash flows
• Financing cash flows
• Net present value
• Internal rate of return
• Discount rate
• Cost of capital
• WACC
• Risk free rate
• Market returns
• Terminal Value
• Cannibalization
• Opportunity cost
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6. Capital Budgeting
• Basic principles
o Cash inflows and cash outflows associated with an investment
o Risk associated with the cash inflows/cash generation
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NPV Example Y0 Y1 Y2 Y3 Y4 Y5 Y6 Y7 TV*
Cash Outflows -15
Cash Inflows 0 1 1.1 1.1 1.2 1.2 1.3 1.3 28.1
Net -15 1.0 1.1 1.1 1.2 1.2 1.3 1.3 28.1
Discounted (@ 10%) -15.00 0.91 0.87 0.83 0.79 0.75 0.72 0.69 14.44
NPV of Project 5.00
* Terminal Value assuming growth rate of 5%
The IRR of the above project is 11.67%

7. Capital Budgeting
• Basic principles (continued):
o Focus on cash flows with respect to shareholder wealth
o Focus on incremental cash flows
• Incremental cash flows
= global corporate cash flows with project
+ global corporate cash flows without project
• Take into account:
o Cannibalization
o Sales creation
o Opportunity cost
o Taxation
o Consider the intangible benefits
• Valuable learning experience
• Broader knowledge base
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8. Issues in Foreign
Investment Analysis
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9. Key Issues
• Goal is to maximize firm value
• Parent vs. project cash flows
o Cash flows generated by the project may differ from cash flows remitted to the
parent
o Consider impact of reinvestment, cannibalization, taxation
• Consider non-financial returns and investments
o A triple-bottom line approach / corporate social responsibility / overall societal
impact
• Adjust for increased managerial, economic and political
risk
o Managing foreign currency risk
o Shortening minimum payback period
o Raising required rate of return
o Adjusting cash flows
o Insure risks appropriately
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10. Growth Options and
Project Evaluation
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11. Nature of
Internationalization
Going
Global
Investment
Model
Joint
Venture
Subsidiary
Greenfield
Acquisition
Export
Model
Direct
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12. Corporate Finance
Decisions
Corporate Finance
Decisions
Debt
Intercompany
Third party
Equity
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Objective is to minimize cost of capital and maximize firm value

13. Corporate Finance
Decisions (Cont’d)
Debt
Short-term or
long-term
Currency Asset-backed Options
Equity
Public vs.
Private vs.
Partner
Ownership
and Control
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14. Case Study
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15. Capital Budgeting
Decisions
• Read the case study handout
• Get in groups of 3-5
• Prepare NPV calculations
Terminal Value = Final Projected Year Cash Flow X
(1+Long-Term Cash Flow Growth Rate)
(WACC – Long-Term Cash Flow Growth Rate)
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16. Answer
O
O
O
O
O
O
O
O
O
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17. NPV for Windsor
CAD Millions 0 1 2 3 4 5 TV
Initial investment -470
Grant 5 5 5 5 5
Revenues 40 80 107 107 107
COS -18 -36 -48 -48 -48
Opex -4 -8 -11 -11 -11
Tax -5 -9 -12 -12 -12
WHT 0 0 0 0 0
Net cash flows -470 19 32 41 41 41 742
NPV -470 17 27 33 30 28 505
Total NPV 170
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18. NPV for Matamoros
MXN Millions 0 1 2 3 4 5 TV
Initial investment -4800
Grant 0 0 0 0 0
Revenues 333 667 1000 1333 1333
COS -80 -160 -240 -320 -320
Opex -33 -67 -100 -133 -133
Tax -66 -132 -198 -264 -264
WHT -8 -15 -23 -31 -31
Net cash flows -4800 146 293 439 585 585 10534
NPV -4800 128 225 296 346 304 5471
Total NPV 1971  CAD 158
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19. Thank you
Junaid Mirza
jm@junaidmirza.com
ca.linkedin.com/in/junaidmirza
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