Solution:

	Year 0	Year 1	Year 2	Year 3	Year 4
Cash flow to parent	−$5,000,000	$1,300,000	$2,100,000	$2,040,000	$3,000,000
PV of parent cash flow		1,120,690	1,560,642	1,306,942	1,656,873
Cumulative NPV		−3,879,310	−2,318,668	−1,011,726	645,147

PTS: 1

27. Petrus Company has a unique opportunity to invest in a two-year project in Australia. The project is expected to generate 1,000,000 Australian dollars (A$) in the first year and 2,000,000 Australian dollars in the second. Petrus would have to invest $1,500,000 in the project. Petrus has determined that the cost of capital for similar projects is 14%. What is the net present value of this project if the spot rate of the Australian dollar for the two years is forecasted to be $.55 and $.60, respectively?

a.	$2,905,817.
b.	−$94,183.
c.	$916,128.
d.	none of the above

ANS: B

Solution:

	Year 0	Year 1	Year 2
Cash flow to parent	−$1,500,000	$550,000	$1,200,000
PV of parent cash flow		482,456	923,361
Cumulative NPV		−1,017,544	−94,183

PTS: 1

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

a.	corporate income taxes.
b.	withholding taxes.
c.	provisions for carrybacks and carryforwards.
d.	tax treaties.
e.	all of the above are characteristics to be considered.

ANS: E PTS: 1

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

a.	withholding taxes
b.	excise taxes
c.	tax credits
d.	carryforwards

ANS: C PTS: 1

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.

a.	high; subsidiary's
b.	high; parent's
c.	low; parent's
d.	A and C
e.	none of the above

ANS: B PTS: 1

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 ____.

a.	positively
b.	negatively
c.	either positively or negatively, depending on the percentage appreciation
d.	none of the above

ANS: D PTS: 1

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:

a.	the parent's perspective should be used to evaluate a foreign project.
b.	the subsidiary's perspective should be used to evaluate a foreign project.
c.	the foreign project should enhance the value of both the parent and the subsidiary.
d.	none of the above

ANS: C PTS: 1

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

a.	initial investment
b.	variable costs
c.	fixed costs
d.	none of the above

ANS: A PTS: 1

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.

a. True

b. False

ANS: F PTS: 1

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

a.	greater than
b.	less than
c.	the same as
d.	any of the above, depending on the specific project

ANS: D PTS: 1

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.

a.	positively; positively
b.	positively; negatively
c.	negatively; positively
d.	negatively; negatively

ANS: D PTS: 1

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

a.	positively; positively
b.	positively; negatively
c.	negatively; positively
d.	negatively; negatively

ANS: A PTS: 1

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

a.	higher; lower
b.	higher; higher
c.	lower; higher
d.	none of the above

ANS: B PTS: 1

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 though 5.

a.	depreciates; depreciates
b.	appreciates; appreciates
c.	depreciates; appreciates
d.	appreciates; depreciates

ANS: C PTS: 1

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.	a more pronounced impact on revenues than on costs.
b.	a less pronounced impact on revenues than on costs.
c.	the same impact on revenues as on costs.
d.	none of the above

ANS: A PTS: 1

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.

a.	should be; should be
b.	should definitely not be; should definitely not be
c.	should definitely not be; should be
d.	should be; should definitely not be

ANS: A PTS: 1

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 ____.

a.	increases; decreases
b.	decreases; increases
c.	increases; increases
d.	none of the above

ANS: C PTS: 1

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

a. True

b. False

ANS: F PTS: 1

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.

a. True

b. False

ANS: T PTS: 1

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.

a. True

b. False

ANS: T PTS: 1

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

a. True

b. False

ANS: F PTS: 1

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.

a. True

b. False

ANS: F PTS: 1

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.

a. True

b. False

ANS: T PTS: 1

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.

a. True

b. False

ANS: T PTS: 1

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

a. True

b. False

ANS: F PTS: 1

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

a. True

b. False

ANS: T PTS: 1

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.

a. True

b. False

ANS: T PTS: 1

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.

a. True

b. False

ANS: F PTS: 1

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.

a. True

b. False

ANS: T PTS: 1

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.

a. True

b. False

ANS: T PTS: 1

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.

a. True

b. False

ANS: T PTS: 1

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.

a. True

b. False

ANS: T PTS: 1

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.

a. True

b. False

ANS: T PTS: 1

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

a. True

b. False

ANS: T PTS: 1

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

a.	The number of units sold by the subsidiary
b.	The subsidiary's earnings before income and taxes (EBIT)
c.	The tax rate the subsidiary is subject to in the host country
d.	Withholding taxes imposed by the host government

ANS: D PTS: 1

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

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

ANS: E PTS: 1

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

a.	Discriminant analysis
b.	Risk-adjusted discount rate
c.	Sensitivity analysis
d.	Simulation

ANS: A PTS: 1

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

a.	It can be used to generate a probability distribution of NPVs.
b.	It generates a probability distribution of NPVs by randomly drawing values for the input variable(s).
c.	It can only be used for one variable at a time.
d.	It can be used to develop probability distributions of all variables with uncertain future values.

ANS: C PTS: 1

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

a.	Blocked funds
b.	Exchange rate fluctuations
c.	Inflation
d.	Financing arrangements
e.	All of the above should be considered.

ANS: E PTS: 1