This document outlines an agenda for a workshop on multinational capital budgeting. The workshop will cover basics of capital budgeting, issues in foreign investment analysis, evaluating growth options and projects, and a case study. Participants will work in groups to calculate net present values for a case study and present their analyses. Key concepts that will be discussed include cash flows, net present value, internal rate of return, discount rates, and adjusting analyses for increased risk when evaluating foreign investments.

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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