CHAPTER 17 Capital Budgeting for the Multinational Corporation

____________ such as better quality, faster time to market, and higher customer satisfaction can have a significant impact on corporate cash flows. a) Intangibles b) Transfer prices c) Economies of scale of distribution d) Value additivity

a) Intangibles

According to the net \present value (NPV) rule, projects with a positive NPV should be a) accepted b)rejected

a) accepted

If the discount rate is based solely on the riskiness of the project's anticipated cash flows, we would refer to it as the a) all-equity rate b) weighted average cost of capital c) debt cost of capital d) all-equity beta

a) all-equity rate

When the introduction of a new product takes sales away from the firm's existing products, it is known as ______. a) cannibalization b) sales creation c) transfer pricing d) opportunity cost

a) cannibalization

Given the differences that are likely to exist between parent and project cash flows, the relevant cash flows to use in project evaluation are the a) incremental worldwide cash flows received by the parent b) incremental worldwide project cash flows c) incremental worldwide project cash flows that can be repatriated to the parent d) total worldwide cash flows generated by the project

a) incremental worldwide cash flows received by the parent

The _______ is defined as the present value of future cash flows discounted at the project's cost of capital minus the initial net cash outlay for the project. a) net present value b) equity-adjusted present value c) cost of capital d) value additivity principle

a) net present value

A foreign project that is _____ when valued on its own can be ________ from the parent firm's standpoint. a) profitable, unprofitable b) unprofitable, profitable c) appreciated, depreciated d) depreciated, appreciated

a) profitable, unprofitable

An investment in the Mezzogiorno will receive a subsidized loan of $12 million from the Italian government. The loan bears an interest rate of 7% in contrast to a market rate of 10%. The loan principal must be paid back in 8 years. What is the present value of the interest subsidy? a) $360,000 b) $1.92 million c) $2.31 million d) $870,000

b) $1.92 million

General Tin (GT) is worried that its mine in Peru will be expropriated during the next 12 months. The Peruvian government has promised, however, to pay compensation of $15 million at the year's end if it expropriates the mine. GT believes that this promise would be kept. If expropriation does not occur this year, it will not occur anytime in the foreseeable future. The mine is expected to be worth $50 million at the end of the year. A wealthy Peruvian has just offered GT $19 million for the mine today. If GT's risk‑adjusted discount rate is 22%, what is the probability of expropriation at which GT is just indifferent between selling now or holding on to its mine? a) 71.2% b) 76.6% c) 23.5% d) 18.9%

b) 76.6%

Cannibalization results when a new project takes away sales from the firm's a) weighted average cost of capital. b) existing product sales. c) incremental cash flows. d)working capital.

b) existing product sales.

In capital budgeting what matters is not the project's total cash flow per period, but the ___________ cash flows generated by the project. a) sales-creating b) incremental c) base-case d) parent

b) incremental

The most important but at the same time the most challenging part of project analysis is to calculate the a) total cash flows b) incremental cash flows c) value of the project added to the firm's value d) the amount a new product takes away from the sales of an already existing product

b) incremental cash flows

The ___________ at which the company's products or inputs are traded internally can significantly cause errors in evaluating the profitability of proposed investments. a) export licenses b) transfer prices c) opportunity costs d) market prices

b) transfer prices

Which one of the following can cause significant errors in the calculation of free cash flows associated with a project? a) export licenses b) transfer prices c) opportunity costs d) market prices

b) transfer prices

Many multinationals are now making small investments in Eastern Europe. These investments a) may be valued using conventional discounted cash‑flow analysis b) will be overvalued using conventional discounted cash‑flow analysis because of their high risks c) should be valued using an expanded internal rate of return value rule that considers the attendant options d) are best valued by using the payback period method

b) will be overvalued using conventional discounted cash‑flow analysis because of their high risks

A new project is projected to yield $2.5 million annually in after-tax profit, based on a local corporate profit tax rate of 40%. However, this profit figure depends on the use of a transfer price of $30 per unit on a component bought from the parent. If the project requires 100,000 units of this component annually, the impact on project profitability and on parent profitability of a boost in the transfer price to $35 will be _______ and ________, respectively. The parent's marginal tax rate is 34% and the incremental tax on subsidiary remittances to the parent is -3%. a) -$500,000, +$500,000 b) -$300,000, +$330,000 c) -$300,000, +$321,000 d) +$500,000, -$500,000

c) -$300,000, +$321,000

Suppose a firm projects cash flows of $2.5 million, $3 million, and $4 million for years 1, 2, and 3, respectively, on an initial investment in Ecuador of $22 million. The firm projects a perpetuity of $5 million in years 4 and beyond. If the required return on this investment is 17%, how large does the probability of expropriation in year 5 have to be before the investment has a negative NPV? Expected compensation in the event of expropriation is $3 million. a) 31% b) 42% c) 22% d)49%

c) 22%

Walt Disney Company is contemplating a new theme park somewhere in Southeast Asia. However, it is concerned about cannibalizing sales of Tokyo Disneyland. Walt Disney should a) not be concerned because if it doesn't build another theme park, another competitor will certainly do so b) not be concerned because the odds are that it will generate enough additional sales to offset any cannibalization that does take place c) be concerned because cannibalization is a real threat d) decrease the amount of transfer pricing between its subsidiaries

c) be concerned because cannibalization is a real threat

When evaluating an investment, the MNC should consider the ____________ cash flows generated by the project. a) total b) variable c) incremental d) fixed

c) incremental

The most desirable property of the NPV criterion is that it evaluates a) investments in the same way as the company's subsidiaries b) new market innovations that are simple to identify c) investments the same way as the company's shareholders d) competitive advantages of the firm realistically

c) investments the same way as the company's shareholders

If all funds in a project are expected to be blocked by government action in perpetuity, the value of the project is _____. a) limited b) unlimited c) zero d) difficult to determine

c) zero

What is the expected real dollar value of the depreciation tax shield in year 10, assuming that the tax write-off is taken at yearend? a) $1.1 million b) $1.9 million c) $2.3 million d)$1.3 million

d) $1.3 million

Global Industries (GI) is planning to use some existing equipment from its own facilities in a foreign project. The used equipment has a book value of $2 million but a market value of $6 million. If GI's marginal tax rate is 34%, what is its opportunity cost of using the used equipment in the foreign project? a) $2 million b) $3.25 million c) $6 million d) $4.64 million

d) $4.64 million

Suppose that a subsidiary operates in a foreign country with a corporate tax rate of 42% and a withholding tax on dividends of 5%. If the U.S. parent has surplus foreign tax credits, what is the marginal rate of tax on remitted profits from the subsidiary? a) 13% b) 34% c) 8% d) 5%

d) 5%

Which of the following is NOT a method for incorporating the additional political and economic risk into foreign investment analysis? a) shortening the minimum payback period, b) raising the required rate of return of the investment c) adjusting cash flows to reflect the specific impact of a given risk d)hedging the expected risk of currency fluctuations with currency futures

d)hedging the expected risk of currency fluctuations with currency futures