International Capital Budgeting Review of Domestic Capital Budgeting 1.Identify the SIZE and TIMING of all relevant cash flows on a time line. 2.Identify the RISKINESS of the cash flows to determine the appropriate discount rate. 3.Find NPV by discounting the cash flows at the appropriate discount rate. 4.Compare the value of competing cash flow streams at the same point in time. Review of Domestic Capital Budgeting The basic net present value equation is Where: T = economic life of the project in years. CFt = expected incremental after-tax cash flow in year t, TVT = expected after tax terminal value including return of net working capital, C0 = initial investment at inception, K = weighted average cost of capital. K = (1 – )Kl + (1 – t)i The NPV rule is to accept a project if NPV  0 and to reject a project if NPV  0 Review of Domestic Capital Budgeting For our purposes it is necessary to expand the NPV equation. Rt = incremental revenue OCt = incremental operating costs Dt = incremental depreciation It = incremental interest expense  = the marginal tax rate CFt = (Rt – OCt – Dt – It)(1 – t) + Dt + It (1 – t) Review of Domestic Capital Budgeting Alternative Formulations CFt CFt = (Rt – OCt – Dt – It)(1 – t) + Dt + It (1 – t) CFt = NIt + Dt + It(1 – t) CFt = (Rt – OCt – Dt)(1 – t) + Dt CFt = NOIt(1 – t) + Dt CFt = (Rt – OCt)(1 – t) + t Dt CFt = OCFt(1 – t) + t Dt We can use CFt = (OCFt)(1 – t) + t Dt to restate the NPV equation as: NPV = S t = 1 T CFt (1 + K)t – C0 TVT (1 + K)T + NPV = S t = 1 T (OCFt)(1 – t) + t Dt (1 + K)t – C0 TVT (1 + K)T + Review of Domestic Capital Budgeting The Adjusted Present Value Model Can be converted to adjusted present value (APV) NPV = S t = 1 T (OCFt)(1 – t) (1 + K)t C0 TVT (1 + K)T + t Dt (1 + K)t + – S t = 1 T APV = S t = 1 T (OCFt)(1 – t) (1 + Ku)t C0 TVT (1 + Ku)T + t Dt (1 + i)t + – t It (1 + i)t + The APV model is a value additivity approach to capital budgeting. Each cash flow that is a source of value to the firm is considered individually. Note that with the APV model, each cash flow is discounted at a rate that is appropriate to the riskiness of the cash flow. APV = S t = 1 T (OCFt)(1 – t) (1 + Ku)t C0 TVT (1 + Ku)T + t Dt (1 + i)t + – t It (1 + i)t + The Adjusted Present Value Model Domestic APV Example Consider this project, the timing and size of the incremental after-tax cash flows for an all-equity firm are: 01 2 3 4 -$1,000 $125 $250 $375 $500 The unlevered cost of equity is r0 = 10%: = –$1000 = $125 = $250 = $375 I = 10 NPV APV = S t = 1 T (OCFt)(1 – t) (1 + Ku)t C0 TVT (1 + Ku)T + t Dt (1 + i)t + – t It (1 + i)t + ? = CF0 CF1 CF2 CF3 CF4 = $500 Domestic APV Example Now, imagine that the firm finances the project with $600 of debt at r = 8%. The tax rate is 40%, so they have an interest tax shield worth t×I = .40×$600×.08 = $19.20 each year.

1. International Capital Budgeting
Review of Domestic Capital Budgeting
1.Identify the SIZE and TIMING of all relevant cash flows on a
time line.
2.Identify the RISKINESS of the cash flows to determine the
appropriate discount rate.
3.Find NPV by discounting the cash flows at the appropriate
discount rate.
4.Compare the value of competing cash flow streams at the
same point in time.
Review of Domestic Capital Budgeting
The basic net present value equation is
Where:
T = economic life of the project in years.
CFt = expected incremental after-tax cash flow in year t,
TVT = expected after tax terminal value including return of net
working capital,
C0 = initial investment at inception,
K = weighted average cost of capital.
K = (1 – – t)i

2. Review of Domestic Capital Budgeting
For our purposes it is necessary to expand the NPV equation.
Rt = incremental revenue
OCt = incremental operating costs
Dt = incremental depreciation
It = incremental interest expense
CFt = (Rt – OCt – Dt – It)(1 – t) + Dt + It (1 – t)
Review of Domestic Capital Budgeting
Alternative Formulations CFt
CFt = (Rt – OCt – Dt – It)(1 – t) + Dt + It (1 – t)
CFt = NIt + Dt + It(1 – t)
CFt = (Rt – OCt – Dt)(1 – t) + Dt
CFt = NOIt(1 – t) + Dt
CFt = (Rt – OCt)(1 – t) + t Dt
CFt = OCFt(1 – t) + t Dt
We can use CFt = (OCFt)(1 – t) + t Dt
to restate the NPV equation
as:
NPV =
S
t = 1

3. T
CFt
(1 + K)t
– C0
TVT
(1 + K)T
+
NPV =
S
t = 1
T
(OCFt)(1 – t) + t Dt
(1 + K)t
– C0
TVT
(1 + K)T
+
Review of Domestic Capital Budgeting
The Adjusted Present Value Model
Can be converted to adjusted present value (APV)
NPV =
S
t = 1
T
(OCFt)(1 – t)
(1 + K)t
C0
TVT
(1 + K)T

4. +
t Dt
(1 + K)t
+
–
S
t = 1
T
APV =
S
t = 1
T
(OCFt)(1 – t)
(1 + Ku)t
C0
TVT
(1 + Ku)T
+
t Dt
(1 + i)t
+
–
t It
(1 + i)t
+
The APV model is a value additivity approach to capital
budgeting. Each cash flow that is a source of value to the firm

5. is considered individually.
Note that with the APV model, each cash flow is discounted at a
rate that is appropriate to the riskiness of the cash flow.
APV =
S
t = 1
T
(OCFt)(1 – t)
(1 + Ku)t
C0
TVT
(1 + Ku)T
+
t Dt
(1 + i)t
+
–
t It
(1 + i)t
+
The Adjusted Present Value Model
Domestic APV Example
Consider this project, the timing and size of the incremental
after-tax cash flows for an all-equity firm are:

6. 01 2 3 4
-$1,000 $125 $250 $375 $500
The unlevered cost of equity is r0 = 10%:
= –$1000
= $125
= $250
= $375
I
= 10
NPV
APV =
S
t = 1
T
(OCFt)(1 – t)
(1 + Ku)t
C0
TVT
(1 + Ku)T
+
t Dt
(1 + i)t
+
–
t It
(1 + i)t
+
?
=
CF0

7. CF1
CF2
CF3
CF4
= $500
Domestic APV Example
Now, imagine that the firm finances the project with $600 of
debt at r = 8%.
The tax rate is 40%, so they have an interest tax shield worth
t×I = .40×$600×.08 = $19.20 each year.
APV =
$125
1.10
01 2 3 4
-$1,000 $125 $250 $375 $500
+
$250
(1.10)2
+
$375
(1.10)3
+

8. $500
(1.10)4
+
$19.20
(1.08)2
+
$19.20
(1.08)3
+
$19.20
(1.08)4
$19.20
1.08
+
– $1,000
The APV of the project under leverage is:
APV =
S
t = 1
T
(OCFt)(1 – t)
(1 + Ku)t
C0
TVT
(1 + Ku)T
+
t Dt
(1 + i)t

9. +
–
t It
(1 + i)t
+
12
Note that with the APV model, each cash flow is discounted at a
rate that is appropriate to the riskiness of the cash flow.
Capital Budgeting from the Parent Firm’s Perspective
The APV model is useful for a domestic firm analyzing a
domestic capital expenditure or for a foreign subsidiary of a
MNC analyzing a proposed capital expenditure from the
subsidiary’s viewpoint.
The APV model is NOT useful for a MNC in analyzing a
foreign capital expenditure from the parent firm’s perspective.
Blocked cash flows
Extra taxes
Marginal tax rates
Interest rates
Exchange rates
APV =
S
t = 1
T
(OCFt)(1 – t)
(1 + Ku)t
C0
TVT

10. (1 + Ku)T
+
t Dt
(1 + i)t
+
–
t It
(1 + i)t
+
Donald Lessard developed an APV model for a MNC analyzing
a foreign capital expenditure. The model recognizes many of the
particulars peculiar to foreign direct investment.
Capital Budgeting from the Parent Firm’s Perspective
Capital Budgeting from the Parent Firm’s Perspective
The operating cash flows must be translated back into the parent
firm’s currency at the spot rate expected to prevail in each
period.
The operating cash flows must be discounted at the unlevered
domestic rate
APV =
S
t = 1

11. T
(1 + Kud)t
TVT
(1 + Kud)T
+
t Dt
(1 + id)t
+
–
StOCFt(1 – t)
S0C0 + S0RF0 + S0CL0 -
S
t = 1
T
St
t It
(1 + id)t
S
St
+
t = 1
T
St
LPt
(1 + id)t
S

12. St
t = 1
T
Capital Budgeting from the Parent Firm’s Perspective
OCFt represents only the portion of operating cash flows
available for remittance that can be legally remitted to the
parent firm.
or foreign subsidiary’s.
APV =
S
t = 1
T
(1 + Kud)t
TVT
(1 + Kud)T
+
t Dt
(1 + id)t
+
–
StOCFt(1 – t)
S0C0 + S0RF0 + S0CL0 -
S

13. t = 1
T
St
t It
(1 + id)t
S
St
+
t = 1
T
St
LPt
(1 + id)t
S
St
t = 1
T
S0RF0 represents the value of accumulated restricted funds
(in the amount of RF0) that are freed up by the project.
Denotes the present value (in the parent’s currency) of any
concessionary loans, CL0, and loan payments, LPt , discounted
at id .
APV =
S
t = 1

14. T
(1 + Kud)t
TVT
(1 + Kud)T
+
t Dt
(1 + id)t
+
–
StOCFt(1 – t)
S0C0 + S0RF0 + S0CL0 -
S
t = 1
T
St
t It
(1 + id)t
S
St
+
t = 1
T
St
LPt
(1 + id)t
S

15. St
t = 1
T
Capital Budgeting from the Parent Firm’s Perspective
One alternative for international decision makers:
1. Estimate future cash flows in foreign currency.
2. Convert to the home currency at the predicted exchange rate.
Use PPP, IRP et cetera for the predictions or actual
rates arranged via hedges.
3. Calculate NPV using the home currency cost of capital.
Capital Budgeting from the Parent Firm’s Perspective:
Alternative 1
18
2
Capital Budgeting from the Parent Firm’s Perspective: Example
A U.S.-based MNC is considering a European opportunity.
It’s a simple example
There is no incremental debt
There is no incremental depreciation
There are no concessionary loans
There are no restricted funds
Capital Budgeting from the Parent Firm’s Perspective: Example
We can use a simplified APV:
APV =

16. S
t = 1
T
StOCFt(1 – t)
(1 + Kud)t
– S0C0
APV =
S
t = 1
T
(1 + Kud)t
TVT
(1 + Kud)T
+
t Dt
(1 + id)t
+
–
StOCFt(1 – t)
S0C0 + S0RF0 + S0CL0 -
S
t = 1
T
St
t It
(1 + id)t
S

17. St
+
t = 1
T
St
LPt
(1 + id)t
S
St
t = 1
T
Capital Budgeting from the Parent Firm’s Perspective: Example
in dollars is p$ = 6%, and the business risk of the investment
would lead an unlevered U.S. based firm to demand a return of
Kud = i$ = 15%.
–€600
0
€200
1
€500
2
€300

18. 3
A U.S. MNC is considering a European opportunity. The size
and timing of the after-tax cash flows are:
21
2
Capital Budgeting from the Parent Firm’s Perspective: Example
$408.73
$661.94
–$750
$257.28
0
1
2
3
Find the NPV using the cash flow menu of your financial
calculator and and interest rate i$ = 15%:
CF0
CF1
CF2
CF3
I
= 15
NPV
= ?

19. 22
2
Capital Budgeting from the Parent Firm’s Perspective: Example
$408.73
$661.94
–$750
$257.28
0
1
2
3
Without a financial calculator, the NPV can be found as:
23
2
Another recipe for international decision makers:
1. Estimate future cash flows in foreign currency.
2. Estimate the foreign currency discount rate.

20. 3. Calculate the foreign currency NPV using the foreign cost of
capital.
4. Translate the foreign currency NPV into dollars using the
spot exchange rate
Capital Budgeting from the Parent Firm’s Perspective:
Alternative 2
24
2
Foreign Currency Cost of Capital Method
Let’s find i€ and use that on the euro cash flows to find the
NPV in euros.
Then translate the NPV into dollars at the spot rate.
– €600
0
€200
1
€500
2
€300
3
i$ = 15%

21. p$ = 6%
€
$1.25
S0($/€) =
The current exchange rate is
25
2
Before we find i€ let’s use our intuition.
Since the euro-zone inflation rate is 3% lower than the dollar
inflation rate, our euro denominated discount rate should be
lower than our dollar denominated discount rate.
Foreign Currency Cost of Capital Method
26
2
Finding the Foreign Currency Cost of Capital: i€
Recall that the Fisher Effect holds that
real rate
inflation rate

22. nominal rate
So for example the real rate in the U.S. must be 8.49%
(1 + e) =
(1 + i$)
e =
1.15
1.06
– 1 = 0.0849
27
2
Finding the Foreign Currency Cost of Capital: i€
If Fisher Effect holds here and abroad then
If the real rates are the same in dollars and euros (e€ = e$)
(1 + e$) =
(1 + i$)
(1 + e€) =
(1 + i€)
and
(1 + i$)

23. =
(1 + i€)
we have a very useful parity condition:
28
2
Finding the Foreign Currency Cost of Capital: i€
If we have any three of these variables, we can find the fourth:
(1 + i€) =
In our example, we want to find i€
(1 + i$)
=
(1 + i€)
i€ =
(1.15) × (1.03)
(1.06)
– 1
i€ = 0.1175

24. 29
2
International Capital Budgeting: Example
Find the NPV using the cash flow menu and i€ = 11.75%:
CF0
= –€600
CF1
= €200
CF2
= €500
CF3
= €300
I
= 11.75
NPV
= €194.39
– €600
0
€200
1
€500
2
€300
3
$1.25
= $242.99

25. €194.39 ×
€
30
2
Capital Budgeting from the Parent Firm’s Perspective: Example
NPV = –€600 +
(1.1175)3
€300
+
1.1175
€200
= €194.39
+
(1.1175)2
€500
Without a financial calculator, the NPV can be found as:
– €600
0
€200
1
€500

26. 2
€300
3
$1.25
= $242.99
€194.39 ×
€
31
2
International Capital Budgeting
You have two equally valid approaches:
Change the foreign cash flows into dollars at the exchange rates
expected to prevail. Find the $NPV using the dollar cost of
capital.
Find the foreign currency NPV using the foreign currency cost
of capital. Translate that into dollars at the spot exchange rate.
If you watch your rounding, you will get exactly the same
answer either way.
Which method you use is your choice.
32
Back to the full APV
Using the intuition just developed, we can modify Lessard’s
APV model as shown above, if we find it convenient.

27. S0
S0
S0
S0
S0
f
f
f
f
f
APV =
S
t = 1
T
(1 + Kud)t
TVT
(1 + Kud)T
+
t Dt

28. (1 + id)t
+
–
StOCFt(1 – t)
S0C0 + S0RF0 + S0CL0 +
S
t = 1
T
St
t It
(1 + id)t
S
St
+
t = 1
T
St
LPt
(1 + id)t
S
St
t = 1
T
0
1
)

29. 1
(
)
1
(
C
K
TV
K
CF
NPV
T
T
T
t
t
t
-
+
+
+
=
å
=
0
)
1
(
)
1
(
0
1
³
-
+

30. +
+
=
å
=
C
K
TV
K
CF
NPV
T
T
T
t
t
t
.
0
)
1
(
)
1
(
0
1
£
-
+
+
+
=
å
=
C

31. K
TV
K
CF
NPV
T
T
T
t
t
t
å
å
å
å
=
=
=
=
+
-
+
+
-
+
+
+
+
+
+
+
-
=
T
t
t

32. d
t
t
T
ud
T
T
T
t
t
d
t
t
T
t
t
d
t
t
T
t
t
ud
t
t
i
LP
S
CL
S
RF
S
C
S
K
TV

33. S
i
τI
S
i
τD
S
K
τ
OCF
S
APV
1
0
0
0
0
0
0
1
1
1
)
1
(
)
1
(
)
1
(
)
1
(
)
1

34. (
)
1
(
Running Head: International Capital Budgeting Analysis and
Presentation 1
International Capital Budgeting Analysis and Presentation
2
International Capital Budgeting Analysis and Presentation
Name
Institution
Course
Date
International Capital Budgeting Analysis and Presentation
Introduction
The Mexico investment of the country looks very appealing;
this case about the company attributed an increase in operation
costs and reduced operating profits, consideration needs to be
made on whether to take the option or to consider it otherwise.
First, retrieving on the internal financial condition of the
company, it good to analyze that is attributed to the investment
option and relate it to the overall benefit that is to be realized
from taking the portion. Moreover, the conditional factors that
exist between in the market and the predicted change and
preferences in the international market as concerned to the
company’s business. Ultimately, the business of the company in
the international market and the efficiency of financial
accessibility are to be considered in this analysis so as to take a
better decision on the right direction that the firm should take

35. (Eun and Resnick, 2015).
The company is in need to improve in operating profits as it
relates that it has dropped extensively over the last one year.
Despite the drop being out of the experienced global recession,
the company need should look for an alternative that will help
keep it at the top in any recession realized. Equally, the main
agenda for the company is to expand its business operations
worldwide, and this might be the upper hand that should be
considered to provide the likely option of investment the
company, needs to take (Wild, Wild & Han, 2014). The business
of cartilage recycling is seen to improve, and the predictions are
it will improve more in the future as the company operates.
Investment cash flow analysis
The company financial statement indicates that it has incurred
a substantial decrease in net profit. This loss is attributed to the
experienced global recession even affecting the company
competitors. Also regarding the company consolidated financial
statement, the company has a high level of net profit initially
when it introduced the business of printer cartridge recycling.
The required project investment cost is of the new machine is
estimated to be 220, 000 Euro which is a manageable
expenditure as compared to the company’s financial status.
Before getting the full cash flow analysis of the company of its
newly established markets, it god to consider the cash flow
impact that the project will create in the Mexico subsidiary of
the projected returns that the company is associated to realize
from the Mexico subsidiary. This sample analysis can assist to
project that cash flows expected from each subsidiary if the
investment is made in every company operating subsidiary
(Aizenman, Binici & Hutchison, 2014). In the same case,
benefit realized from the project should out make the initial
cash outlay incurred of Euro 220, 000. The benefit can be
realized decrees in the total direct cost of cartilage recycling in
Mexico this is the initial agenda of the company to reduce the
direct cost attributed to the new project or recycling cartilages
and increase the efficiency of the production process. This will

36. help the management to make the decisions on how to solve the
Mexico situation of increased work with few employees.
The decrease is as illustrated in the table below.
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Old Machine TDC
3360000
3774960
4250785
4797366
5133181
5492504
5876980
6288368
6728555
7199553
New Machine TDC
2632570
2930952
3270414
3657410
3913429
4187368
4480484
4794118
51129707
5488786

37. Benefit realized (Cost reduction)
727530
844008
980371
1139956
1219952
1305136
1396496
1494250
1598848
1710767
From the above analysis done for Mexico, it indicates that the
new machine will greatly benefit the company since the
significant value of the labor and material cost realized from the
use of the machine is huge and it can equally over do the initial
cost of investment of the new machine for the production
services.
Machine Durability comparison
The new machine has a short life span. It requires a new
replacement after ten years. The old machine used has a long
lifespan, and it will operate for more time flame despite the
required amount of operators needed. This demand that the
machines replacement cost and scrap value realized should be
compared, and the cost analyzed effectively to make a choice.
For the new machine, when considering the replacement value
and the cost benefit realized from the machine after ten years,
the machine is more preferable for use than the old machine for
the company in all her subsidiaries.
Timing of the Company and the GDP impact on Investment
The timing of the company is perfect in the business of
recycling cartilage is experienced to have a significant increase.
Many customers are realizing the benefit of recycling and added
the advantage that the company provides the services to the
cheaply, the company selling level has a greater chance to
increase in operation and even widen up in its new markets. As
also indicated by the GDP of the Mexico, the market value of

38. all the goods and services produced has increased from 4.4% to
5.1% which implies that the company investment in Mexico
market will increase more its revenue. Although concerning the
recession impact, the GDP has dropped over the last few years.
The recession has a low chance to continue, and at this time, the
GDP of Mexico might increase shortly hence and an indication
of a better investment opportunity for the company in Mexico.
Other Investment Options to take as regards the Exchange Rate
The investment decision of the company will also depend on the
exchange rates and the expected increase or decrease in the
exchange rate of the MXP and EUR. The decision to be made
on the investment should consider the available contractual
agreements that will allow the company to be safe on the
transactional costs that are realized from transacting finance
from Mexico to the main branch in France. The available
major option that the company needs to prefer is to take forward
contracts, futures, and options.
a. Future and Forward Contracts
For instance, from the past exhibited in the Mexican market,
the exchange rate of 1MXP is seen to increase over the years in
a consistent value. During the year 2000, the spot rate of
exchange of MXP to EUR was 9.4 which has consistently
increase over time up to 16.2. This indication shows that the
chances of the exchange rate to continue increasing in the future
are high. This increase suggests that the EUR is strengthening
more as relates to MXP. The best way the company should
transact is by suing the EUR for the advantage of evading the
attributed exchange cost losses. The projection might also
suggest the weakening value of the Euro and the strengthening
of MXP, which will again suggest that the company need to
transact and carry the cash flow analysis in using MXP.
The above decisions may be made more perfect by involving
future and forward contract by exchange rate agencies. That is,
if the company is to invest in Mexico, it will, therefore, need to
enter into a future contract and agree to transact in the future at
a fixed exercise rate. That will mean, if the future sports rate of

39. the company will increase or decrease, the agreed future sport is
what the company needs to use in exchanging it profit realized
on Mexico MXP or EUR to what it prefers bests. But for this
case, the company prediction using the available data indicates
that there is a likely hood of the EUR currency to continue
strengthening. The company, therefore, should determine the
value that the exchange rate is to change as relate to the current
exchange rate. The current exchange rate is 6.6 which therefore
suggest that the exchange rate is likely to increase above 7 in
the subsequent years. The company, therefore, should agree
upon the future exercise rate of 7 and above. Therefore, all the
financial cash flows and should be prepared using the EUR
currency
b. Short-term Bank lending rate and Borrowing
Currency swaps, in this case, implies swapping of interest rate
in two recognized companies (Bénétrix, Lane & Shambaugh,
2015).. If local companies can borrow cheaply in Mexico as
compared to a foreign company, the company should look for a
similar company wishing to borrow in France locally and enter
into a contract of swapping their interests. The Mexican
company will borrow for the company to invest in Mexico.
Similarly, the company will take the responsibility and borrow
for the Mexican company locally. After the investment is made,
both companies will agree to swap the interest rates and
exchange the value of the currency to their local currency.
In this case, the swap might partially work for the company. If
the Mexican subsidiary is recognized locally and can be allowed
to borrow locally as per the local short-term banking rate, the
company can prefer otherwise and use the Mexican subsidiary
to borrow locally. But also considering the local bank lending
rate in Mexico and France, it better to prefer borrowing in
France than in Mexico. The lending rate of the banks in France
is less as compared to Mexico. Also because the company is to
use EUR in transaction, it is better for the company to borrow
locally and avoid attributed exchange rate losses that may result
if it prefers to borrow in Mexico

40. Mexico Risk of the attributed Project.
Since the Mexican subsidiary company is obliged to operate
using the Mexican currency. There is a high risk of the company
losing finances due to the exchange rate. The project of the new
machine will result in a significant increase in the returns hence
a high probable chance of the company y to realize high profits
in Mexico. The profits realized would be in Mexican currency
since the trading is done in Mexican local currency. The
recording of this profits will require the conversation of the
profits to EUR which will result in a financial loss due to
exchange rate losses. The MXP is projected to reduce in value,
which therefore suggests that the profits of the company will
also be affected.
The increase in the inflation rate in Mexico is a greater
indication of the weakening value of the Mexican Currency, that
is, MXP will be cheap as compared to EUR. The solution, in
this case, requires the company to have more strategized ways
of how to maximize the return in Mexico and offset the losses
that are attributed to the use of the local currency. One of the
solutions can be spreading of the investment to other
subsidiaries to help the company offset the losses realized in
Mexico investments. The objective of the company is also
reducing the cost of recycling the cartilages as low as possible
to encourage more customers. Tom achieve so, the company is
likely to prefer alternative ways f pricing, product positioning
and designing to outdo the competitors in Mexico and expand
more the customer base
The underlying project of the company to start recycling
printer cartilages from other companies may be a booster but of
a short time duration. It might dilute the image and the
preferences of the customer on the company product. For
instance, the customers prefer more to the company products
since they are durable and long serving as compared to other
companies. The brand image of the company over its products is
best maintained if the company focuses on improving more on
its products and offering services that only relates to the

41. production of its own services, in that case since the new
machine can result to more spacious room, the company is
advised to introduce more machines and expand more its
product sale within Mexico ta have a larger market share
(Baker, Bloom & Davis, 2015).
Bond Trading Investment Option
The company should take an alternative to hedge against the
risk that is related from the bond business. This type of
investment currently should raise a concern considering the
Long-term peso corporate bonds and the Euro-dominated
corporate bonds. The two have a different, yielding percentage.
The Peso- dominated corporate bond yielding rate is 9.21% high
as compared to the long-term Euro-dominated corporate bond
which has a yielding value of 4.75%. The predicted change in
the market suggests that the long-term peso-dominated
corporate bond is likely to reduce in value as related to EUR.
For that case, to hedge against the risk, the company currently
should take the Euro bond to exchange in the future. In this
case, the Euro will increase in value thus meaning that the
company will gain. If the contrary applies, the company will
lose since it will need to exchange for the Peso dominated
corporate bond for a less value as relates to the current selling
and buying value.
Moreover, the borrowing rate for in France and Mexico will
determine the place of borrowing that the company should use.
In Mexico, the borrowing rate of the bond is very expensive as
compared with the borrowing rate in France. From the company
records, French banks’ prime rate for Euro loans is 4.99$ and
while the rate in Mexico on short-term peso loans is about
8.10%.This rate indicates that it will be more expensive for the
company to borrow in Mexico as relates to borrowing in France.
Therefore, all the borrowing decisions on the investment of the
project should be made in France to avoid the extra cost of
borrowing in France.
Also considering an investment in Ten-year government Bond
in Mexico and France, the Mexico government bond is unstable,

42. and it does not provide a predictable pattern a company can use
to predict the future value of the bond. The ten year France
Government Bond shows an increasing trend a bit consistent but
not very much predictable. The rates of the two bonds are
different. In Mexico, the ten-year bond rate is seen to have a
high rate as compared to France. This factor also gives France
the upper of being the best place of doing the borrowing for the
investment options.
The Optimal
Solution
to Invest
Foremost, the analytical consideration of the project, that is,
use of the new machine from German evidently provides every
support of the project to be a viable endeavor for the company.
The value of cost-benefit realized is enough to let the
conclusion of making a decision to invest in the project. Few of
the advantages realized include the reduction of the labor cost,
reduction in work burden as experienced in the Mexican
subsidiary and reduced damage of the cartilages due to
effectiveness attained by the machine at work. Secondly, the
investment option of the company is timely at the time where
there is high expectation increase in GDP and the related
projected increase preferences of the customer to recycle their
cartilages.
Numerically, there are other considerations that relate to

43. exchange rates. For the Mexico case, the interest rate is
projected to increase. Major transactions should be done by use
of EUR currency to avoid currency exchange losses. The table
below indicates the year-end spot exchange rate which provides
the basis of the assumption of strengthening of the value of
EUR as related to MXP
Year
Year-end Spot Exchange Rate (MXP/EUR)
2000
9.4
2001
9.5
2002
10.4
2003
12.9
2004
15.3
2005
13.3
2006
14.4
2007

44. 16.2
The optimal selection there requires the company to use EUR as
the currency in the preparation of its cash flow statements.
About the exchange rates, the company can also prefer on
taking future or forward contracts to reduce the risk attributed
to the changes that may result due to exchange rates.
The risk the project in Mexico can be regulated if the company
can develop policies that relate to the Mexican market and the
translation cost that should be incurred. Since the new project
is to be used as a better alternative to reduce the labor costs and
solve out the complaint from raised over Mexican company
subsidiary of lacking enough personnel. It will be the better
alternative for the company to hasten and implement the project
as instant as possible. Moreover, the market prediction of
Mexico is promising despite the experienced global recession;
the company can hasten up its ways of production in the
subsequent year and take advantage of its brand products to
outdo similarly developed competitors in the market and well
expand more its market share in Mexico.
The idea for the company is to develop a discounted cash flow
model that will assist make a decision of carrying the project of
the new machine to other 28 company subsidiaries and also
introduce the recycling business to every branch in the country
with lower cost. This will considerably be implementable in

45. consideration of even the subsidiaries that operate outside the
Europe region. The most challenging impact will be upon the
company deciding on the borrowing and the exchange rates and
develop ways to reduce the risk attributed due to the change of
the two factors
Conclusion
The company system of subsidiary operations gives it a better
chance of easily securing new markets. Moreover, the new idea
identified that relates to the introduction of a new machines
gives the company a better chance to operate internationally
with low damage cots and direct cost. The market is also
promising and they haven’t yet realized the new trend of
recycling printer cartilages. The brand name of the company,
that is, long serving and durable products is one of the booster
that promotes the company business internationally. To take
the advantage of that new international markets, the company
should consider other related decisions that will impact on its
international investment project (Bodie, Kane & Macus, 2013).
The decisions should include the exchange rate fluctuations,
gross domestic product of the host countries and the interest
rate fluctuation of bonds and bank loan lending rate. This will
help the company make financial decisions on the currency to
trade on, how to determine the cash flows of the projects by

46. developing a better prediction models
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