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1. If a U.S. parent is setting up a French subsidiary, and funds from the subsidiary will be periodically sent to the parent, the ideal situation from the parent's perspective is a ____ after the subsidiary is established.

strengthening euro

2. According to the text, in order to develop a distribution of possible net present values from international projects, a firm should use:

simulation

3. When evaluating international project cash flows, which of the following factors is relevant?

future inflation.
blocked funds.
exchange rates.

4. In general, increased investment by the parent in the foreign subsidiary causes more exchange rate exposure to the parent over time because the cash flows remitted to the parent will be larger.

True

5. Blocked funds may penalize a project if the return on the forced reinvestment in the foreign country is less than the required rate of return on the project.

True

6. When assessing a German project administered by a German subsidiary of a U.S.-based MNC solely from the German subsidiary's perspective, which variable will most likely influence the capital budgeting analysis?

the German government's tax rate.

7. In capital budgeting analysis, the use of a cumulative NPV is useful for:

determining the time required to achieve a positive NPV.

8. Assume the parent of a U.S.-based MNC plans to completely finance the establishment of its British subsidiary with existing funds from retained earnings in U.S. operations. According to the text, the discount rate used in the capital budgeting analysis on this project should be most affected by:

the parent's cost of capital.

9. Assume a U.S.-based MNC has a Chilean subsidiary that annually remits 30 million Chilean pesos to the U.S. If the peso ____, the dollar amount of remitted funds ____.

depreciates; decreases

10. Assume an MNC establishes a subsidiary where it has no other existing business. The present value of parent cash flows from this subsidiary is more sensitive to exchange rate movements when:

the parent finances the entire investment.

11. If an MNC exports to a country, then establishes a subsidiary to produce and sell the same product in the country, then cash flows from prevailing operations would likely be ____ affected by the project. If an MNC establishes a foreign manufacturing subsidiary that buys components from the parent, the cash flows from prevailing operations would likely be ____ affected by the project.

adversely; favorably

12. An MNC is considering establishing a two-year project in New Zealand with a $30 million initial investment. The firm's cost of capital is 12%. The required rate of return on this project is 18%. The project is expected to generate cash flows of NZ$12 million in Year 1 and NZ$30 million in Year 2, excluding the salvage value. Assume no taxes, and a stable exchange rate of $.60 per NZ$ over the next two years. All cash flows are remitted to the parent. What is the break-even salvage value?

about NZ$25 million.
SOLUTION:

13. A firm considers an exporting project and will invoice the exports in dollars. The expected cash flows in dollars would be more difficult if the currency of the foreign country is ____.

volatile

14. If the parent charges the subsidiary administrative fees, the earnings from the project will appear low to the parent and high to the subsidiary.

False

15. Other things being equal, a blocked funds restriction is more likely to have a significant adverse effect on a project if the currency of that country is expected to ____ over time, and if the interest rate in that country is relatively ____.

depreciate; low

16. If a multinational project is assessed from the subsidiary's perspective, withholding taxes are ignored for project assessment.

True

17. Other things being equal, firms from a particular home country will engage in more international acquisitions if they expect foreign currencies to ____ against their home currency, and if their cost of capital is relatively ____.

appreciate; low

18. The discrepancy between the feasibility of a project in a host country from the perspective of the U.S. parent versus the subsidiary administering the project is likely to be greater for projects in countries where:

the currency of the host country is expected to depreciate consistently.

19. The break-even salvage value of a particular project is the salvage value necessary to:

make the project's return equal the required rate of return.

20. The impact of blocked funds on the net present value of a foreign project will be greater if interest rates are ____ in the host country and there are ____ investment opportunities in the host country.

very low; limited

21. One foreign project in Hungary and another in Japan had the same perceived value from the U.S. parent's perspective. Then, the exchange rate expectations were revised, upward for the value of the Hungarian forint and downward for the Japanese yen. The break-even salvage value for the project in Japan would now be ____ from the parent's perspective.

higher than that for the Hungarian project

22. Exchange rates for purposes of multinational capital budgeting:

are very difficult to forecast.

23. A U.S.-based MNC has just established a subsidiary in Algeria. Shortly after the plant was built, the MNC determines that its exchange rate forecasts, which had previously indicated a slight appreciation in the Algerian dinar, were probably false. Instead of a slight appreciation, the MNC now expects that the dinar will depreciate substantially due to political turmoil in Algeria. This new development would likely cause the MNC to ____ its estimate of the previously computed net present value.

lower

28. Which of the following is not a characteristic of a country to be considered within an MNC's international tax assessment?

corporate income taxes.
withholding taxes.
provisions for carrybacks and carryforwards.
tax treaties.

29. Like income tax treaties, ____ help to avoid double taxation and stimulate direct foreign investment.

tax credits

30. If the parent's government imposes a ____ tax rate on funds remitted from a foreign subsidiary, a project is less likely to be feasible from the ____ point of view.

high; parent's

31. If a subsidiary project is assessed from the subsidiary's perspective, then an expected appreciation in the foreign currency will affect the feasibility of the project ____.

positively
negatively
either positively or negatively, depending on the percentage appreciation
none of the above

32. When a foreign subsidiary is not wholly owned by the parent and a foreign project is partially financed with retained earnings of the parent and of the subsidiary, then:

the foreign project should enhance the value of both the parent and the subsidiary.

33. The ____ is (are) likely the major source of funds to support a particular project.

initial investment

34. Because before-tax cash flows are necessary for an adequate capital budgeting analysis, international tax effects need not be determined on a proposed foreign project.

False

35. The required rate of return of a project is ____ the MNC's cost of capital.

greater than
less than
the same as
any of the above, depending on the specific project

36. An international project's NPV is ____ related to the size of the initial investment and ____ related to the project's required rate of return.

negatively; negatively

37. An international project's NPV is ____ related to consumer demand and ____ related to the project's salvage value.

positively; positively

38. Everything else being equal, the ____ the depreciation expense is in a given year, the ____ a foreign project's NPV will be.

higher; higher

39. A foreign project generates a negative cash flow in year 1 and positive cash flows in years 2 through 5. The NPV for this project will be higher if the foreign currency ____ in year 1 and ____ in years 2 through 5.

depreciates; appreciates

40. If an MNC sells a product in a foreign country and imports partially manufactured components needed for production to that country from the U.S., then the local economy's inflation will have:

a more pronounced impact on revenues than on costs.

41. When conducting a capital budgeting analysis and attempting to account for effects of exchange rate movements for a foreign project, inflation ____ included explicitly in the cash flow analysis, and debt payments by the subsidiary ____ included explicitly in the cash flow analysis.

should be; should be

42. As the financing of a foreign project by the parent ____ relative to the financing provided by the subsidiary, the parent's exchange rate exposure ____.

increases; increases

43. In conducting a multinational capital budgeting analysis, the subsidiary's perspective should always be used.

False

44. The feasibility of a multinational project from the parent's perspective is dependent not on the subsidiary cash flows but on the cash flows that it ultimately receives.

True

45. The required rate of return used to discount the relevant cash flows from a foreign project may differ from the MNC's cost of capital because of that particular project's risk.

True

46. In multinational capital budgeting, depreciation is treated as a cash outflow.

False

47. No matter what the probability distribution of future exchange rates is, as long as one out of several scenarios results in a negative net present value (NPV), a project should not be accepted.

False

48. If a foreign project is financed with a subsidiary's retained earnings, the subsidiary's investment could be viewed as an opportunity cost, since the funds could be remitted to the parent rather than invested in the foreign project.

True

49. If a host government restricts the remittances from a foreign subsidiary, a possible solution is to let the subsidiary obtain partial financing for the project.

True

50. When managers use NPV analysis, agency costs are eliminated, and governance is not needed to monitor MNC decisions regarding projects.

False

51. Sometimes, a multinational project may appear feasible from the subsidiary's perspective but not from the parent's perspective and vice versa.

True

52. The feasibility of a multinational project from the parent's perspective is dependent not on the subsidiary cash flows but on the cash flows that it ultimately receives.

True

53. Assuming that a subsidiary is wholly owned, a subsidiary's perspective is appropriate in attempting to determine whether a project will enhance the firm's value.

False

54. The required rate of return used to discount the relevant cash flows from a foreign project may differ from the MNC's cost of capital because of that particular project's risk.

True

55. If a parent's perspective is used in analyzing a multinational project, the relevant cash flows are the dollars ultimately received by the parent as a result of the project; the relevant initial outlay is the investment by the parent.

True

56. If partial financing is provided by the foreign subsidiary, including foreign interest payments in the cash flow analysis may avoid overstatement of the estimated foreign cash flows.

True

57. Three common methods to incorporate an adjustment for risk into the capital budgeting analysis are the use of risk-adjusted discount rates, sensitivity analysis, and simulation.

True

58. The greater the uncertainty about a project's forecasted cash flows, the larger should be the discount rate applied to cash flows, other things being equal.

True

59. The objective of sensitivity analysis in capital budgeting is to determine how sensitive the NPV is to alternative values of the input variables.

True

60. ____ can cause the parent's after-tax cash flows to differ from the subsidiary's after-tax cash flows.

Withholding taxes imposed by the host government

61. ____ is an input required for a multinational capital budgeting analysis, given that it is conducted from the parent's viewpoint.

Salvage value
Price per unit sold
Initial investment
Consumer demand
All of the above are inputs required for capital budgeting analysis.

62. ____ is not a method of incorporating an adjustment for risk into the capital budgeting analysis.

Discriminant analysis

63. Which of the following is not true regarding simulation?

It can only be used for one variable at a time.

64. Which of the following is not a factor that should be considered in multinational capital budgeting?

Blocked funds
Exchange rate fluctuations
Inflation
Financing arrangements
All of the above should be considered.

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