Question

Ch 17: 7. International capital budgeting

One of the important components of multinational capital budgeting is to analyze the cash flows generated from subsidiary companies. Consider this case:

Sacramone Products Co. is a U.S. firm evaluating a project in Australia. You have the following information about the project:

•	The project requires an investment of AU$915,000 today and is expected to generate cash flows of AU$1,000,000 at the end of each of the next two years.
•	The current exchange rate of the U.S. dollar against the Australian dollar is $0.7877 per Australian dollar (AU$).
•	The one-year forward exchange rate is $0.8109 / AU$, and the two-year forward exchange rate is $0.8455 / AU$.
•	The firm’s weighted average cost of capital (WACC) is 9%, and the project is of average risk. 1: What is the dollar-denominated net present value (NPV) of this project?      A: $881,807      B: $845,065      C: $734,839      D: $661,355 2: There are three major types of international credit markets. Read the following statement and then indicate which type of international credit market is being described. Nitreca Chemicals Inc. took out a 10-year floating rate bank loan with an interest rate tied to LIBOR to finance a multinational project.      A; Foreign bond      B: Eurocredit      C: Eurobond

Answer 1

Answer 1. Refer following screenshots for the solution.

International Capital Budgeting.xlsx - Excel 0 0 x & Share Data Review View Power Pivot - Sign in O Tell me what you want to do.... = == Wrap Text A AutoSum General 4 Fill - BSSY Jabe = File Home Insert Page Layout Formulas % Cut Calibri - 10 -A A BE Copy Paste Format Printer B I U - - - A Clipboard Font A1 - X for Α C E Merge & Center - $ % 898 Insert Delete Format Conditional Format as Cell Formatting Table Styles Styles Clear Sort & Find & Filter Select Editing Alignment Number Cells D E F G H I J K L M N O P Q Years 2 TOTAL 2,000,000 Particulars Cash flows in AUD Discount Rate of 9% PVCF in AUD Forward Rates PVCF in USD Initial Investment in AUD Exchange Rate Initial Investment in USD Net Present Value in USD 1,000,000 0.9174 917,431 0.8109 743,945 1,000,000 0.8417 841,680 0.8455 711,640 1,759,111 1,455,585 915,000 0.7877 720,746 734,840 Sheet1 Ready @ J -- + - 2:51 PM 100% E A 7 * 28/03/2020 8

Refer following screenshot for the formula used.

International Capital Budgeting.xlsx - Excel 0 x & Share Data Review View Power Pivot Tell me what you want to do.... = == Wrap Text Η General BSSY Jabe = File Home Insert Page Layout Formulas Cut Calibri - 10 -A A ES Copy - Paste B IU D , A, Format Painter Clipboard Font A1 - fac 0 - Sign in ΣAutoSum' ΑΥΟ Fill zu Sort & Find & Clear Filter Select Editing E Merge & Center - $ % 4809 Insert Delete Format Conditional Format as Formatting Table Styles Cell Styles Alignment Number Cells A E Years TOTAL =SUM(C4:04) Particulars Cash flows in AUD Discount Rate of 9% PVCF in AUD Forward Rates PVCF in USD Initial Investment in AUD Exchange Rate Initial Investment in USD Net Present Value in USD 1000000 =1/(1.09) C3 =C4*C5 0.8109 =C6 C7 1000000 =1/(1.09) D3 =D4*D5 0.8455 =D6*D7 =SUM(C6:06) =SUM(C8:08) 915000 0.7877 =E9*E10 =E8-E11 Sheet1 + Ready @ J -- - + 100% 2:52 PM E A4 x W* 28/03/20208

Answer 2. Since the instrument is linked to LIBOR, it is assumed to be a Loan which is taken outside the US. A foreign bond is a bond issued in a domestic market by a foreign entity in the domestic market's currency as a means of raising capital. Hence, the answer is a Foreign Bond.