Complexities of Budgeting for a Foreign Project

Essay Questions

16.1 Complexities of Budgeting for a Foreign Project

1) Explain how political risk and exchange rate risk increase the uncertainty of international projects for the purpose of capital budgeting.

16.2 Project versus Parent Valuation

1) The authors highlight a strong theoretical argument in favor of analyzing any foreign project from the viewpoint of the parent. Provide at least three reasons why the parent’s viewpoint is superior to the local viewpoint and give an example of when the local viewpoint fails to maximize the value of the firm.

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16.3 Illustrative Case: Cemex Enters Indonesia

1) Capital budgeting typically requires some type of sensitivity analysis. In the case of international capital budgeting from the project perspective, analysts consider political risk, foreign exchange risk and foreign exchange risk. Identify and discuss the important aspects of these two types of risk considerations.

5.Whether the future cash flows are forgone

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16.4 Real Option Analysis

1) What is real option analysis? How does it differ from the discounted cash flow approach to project evaluation? Why do some decision-makers prefer the real option approach over the DCF approach?

16.5 Project Financing

1) What is project financing and what are the factors critical to its success?

16.6 Cross-Border Mergers and Acquisitions

1) Compared to a greenfield investment, list advantages and disadvantages of a cross-border merger or acquisition