MULTINATIONAL COMPANIES (MNC`s)
Capitalbudgeting in multinational companies (MNCs)
­­­­­­­Eventhough the basic techniques used in capital budgeting may be similarfor multinational companies as compared with domestic firms, thefirms which operate across the borders may face risks that areunfamiliar to the international environment. There are two majorcommon types of risks that are likely to face a multinationalcompany. These include exchange rate risk and political risk. Exchange rate risk indicates the dangers of the uncertainties thatunexpected exchange rate fluctuations. The ratio at which money isexchanged for the currencies is shown by exchange rates. The changesin this exchange rate will have a direct impact on the profitabilityof these multinational companies. This type of jeopardy can bereduced by funding the projects partially or wholly with localcurrencies. However, political risk is much difficult to do away withthough it can be managed by ensuring compliance with the government’srules and regulations.
Risksin Capital Budgeting for MNCs
Capitalbudgeting may sometimes appear difficult for a multinational companydue to uncertainties involved. This makes projection of cash flows tobe harder. However, project managers can address this issue by use ofrisk-adjusted rates to evaluate the projects. Cash also flows need tobe modified so as to incorporate political risk depending on thepolitical environment that the firm is operating. Most largecompanies use NPV technique to evaluate their project viability. Itis always good to apply the adjusted discounting rate of interest, ifthis system is used, which makes it better than using the Pay BackPeriod technique, which ignores time value of money and othersignificant risks.
CapitalBudgeting Decisions of Multinational Companies
Inmost cases, the risks associated with international business may havean impact on the capital decisions made. Some project may be approvedfor implementation even if they have a negative net present valuedepending on the motive of doing business internationally. Forexample, a firm can choose to invest, to ensure continuous access tothe market or even to dispose of its excess supply. A project mayalso be approved for implementation even if it has an adverse NPV soas to avoid rivalry entry into the market.
LawrenceJ. & Chad J. (2010).Principlesof Managerial finance13thedition.NewYork:Pearson Education.