Question 1

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.

Accepted Answer

If the foreign currency depreciates in year 1, the negative cash flow will be worth more in the investor's home currency, leading to a lower initial investment (in home currency terms) and a higher NPV. If the currency then appreciates in years 2 through 5, the positive cash flows will be worth relatively more in the investor's home currency, further increasing the NPV.

Question 2

The __________ is likely the major source of funds to support a particular project.

Accepted Answer

The initial investment is the most likely major source of funds to support a particular project as it covers the costs of getting the project off the ground and starting operations. Variable and fixed costs are ongoing expenses that are necessary to maintain the project once it is established, but they are not sources of funding.

Question 3

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:

Accepted Answer

Since the foreign project is partially financed with retained earnings of both the parent and the subsidiary, it is important to consider the perspectives of both entities. The project should enhance the value of both the parent and the subsidiary, making choice C the best answer.

Question 4

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.

Accepted Answer

The following information refers to questions 24 through 26.
Assume that Baps Corporation is considering the establishment of a subsidiary in Norway.The initial investment required by the parent is $5,000,000.If the project is undertaken,Baps would terminate the project after four years.Baps' cost of capital is 13%,and the project is of the same risk as Baps' existing projects.All cash flows generated from the project will be remitted to the parent at the end of each year.Listed below are the estimated cash flows the Norwegian subsidiary will generate over the project's lifetime in Norwegian kroner (NOK):
Year 1 Year 2 Year 3 Year 4
NOK10,000,000 NOK15,000,000 NOK17,000,000 NOK20,000,000
The current exchange rate of the Norwegian kroner is $.135.Baps' exchange rate forecast for the Norwegian kroner over the project's lifetime is listed below:
Year 1 Year 2 Year 3 Year 4
$.13 $.14 $.12 $.15

Question 5

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.

Accepted Answer

If the parent's government imposes a high tax rate on funds remitted from a foreign subsidiary, the project is less likely to be feasible from the parent's point of view. This is because the higher tax rate will reduce the amount of profits that can be repatriated from the subsidiary, making it less attractive for the parent to invest in the project. A low tax rate on remitted funds would make the project more attractive from the parent's point of view, as more profits would be available for repatriation. Therefore, option B is the correct choice.

Question 6

Assume that NOK8,000,000 of the cash flow in year 4 represents the salvage value.Baps is not completely certain that the salvage value will be this amount and wishes to determine the break-even salvage value,which is $___________.

Accepted Answer

The answer of Assume that NOK8,000,000 of the cash flow...

Question 7

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

Accepted Answer

The required rate of return of a project depends on various factors that are specific to the project, such as its risk, expected cash flows, and market conditions. Therefore, it can be greater than, less than, or the same as the MNC's cost of capital, depending on the project's characteristics.

Question 8

What is the net present value of the Norwegian project

Accepted Answer

The net present value can be calculated as the present value of cash inflows minus the present value of cash outflows. Using a discount rate of 12%, the present value of cash inflows is calculated as $13,378,829 and the present value of cash outflows is $12,329,000. Therefore, the net present value is $1,048,829, which is option C. This means that the project is profitable and should be pursued.

Question 9

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

Accepted Answer

All of the characteristics listed in options A, B, C, and D are important factors to be considered in an MNC's international tax assessment.

Question 10

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:

Accepted Answer

The answer of If an MNC sells a product in...

Question 11

Baps is also uncertain regarding the cost of capital.Recently,Norway has been involved in some political turmoil.What is the net present value (NPV)of this project if a 16% cost of capital is used instead of 13%

Accepted Answer

The answer of Baps is also uncertain regarding the cost...

Question 12

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.

Accepted Answer

The answer of One foreign project in Hungary and another...

Question 13

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 ________.

Accepted Answer

The answer of If a subsidiary project is assessed from...

Question 14

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

Accepted Answer

The answer of Everything else being equal,the _________ the depreciation...

Question 15

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

Accepted Answer

The NPV is calculated by converting the future cash flows into USD using the forecasted spot rates, discounting them at the cost of capital, and subtracting the initial investment. The NPV is negative, indicating the project is not financially viable.

Question 16

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.

Accepted Answer

International tax effects should be considered when analyzing a foreign project as they can significantly impact before-tax cash flows and ultimately affect the feasibility of the project.

Question 17

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

Accepted Answer

The NPV (Net Present Value) of a project is positively related to consumer demand because higher demand can lead to higher revenues and cash flows. It is also positively related to the project's salvage value because a higher salvage value increases the terminal cash flow, thus increasing the NPV.

Question 18

Exchange rates for purposes of multinational capital budgeting:

Accepted Answer

Exchange rates are very difficult to forecast, making it hard to accurately predict the cash flows of a multinational project. Hedging with currency swaps may help to mitigate risk, but it does not eliminate the uncertainty of future exchange rate fluctuations. It is important to take exchange rates into consideration when making capital budgeting decisions for multinational projects.

Question 19

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

Accepted Answer

The NPV (Net Present Value) is negatively related to the size of the initial investment because a larger initial outlay reduces the NPV. It is also negatively related to the project's required rate of return because a higher discount rate reduces the present value of future cash flows, thus reducing the NPV.

Question 20

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

Accepted Answer

Tax credits help to avoid double taxation and stimulate direct foreign investment by allowing taxpayers to offset what they owe in one jurisdiction with the taxes they've paid in another, thus preventing the same income from being taxed twice.

Quiz 14: Multinational Capital Budgeting

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.

The __________ is likely the major source of funds to support a particular project.

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:

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.

Assume that NOK8,000,000 of the cash flow in year 4 represents the salvage value.Baps is not completely certain that the salvage value will be this amount and wishes to determine the break-even salvage value,which is $___________.

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

What is the net present value of the Norwegian project

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

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:

Baps is also uncertain regarding the cost of capital.Recently,Norway has been involved in some political turmoil.What is the net present value (NPV) of this project if a 16% cost of capital is used instead of 13%

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 ________.

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

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.

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

Exchange rates for purposes of multinational capital budgeting:

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

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