The authors highlight a strong theoretical argument in favor of analyzing any foreign project from the viewpoint of the parent. Provide at least three reasons why the parent's viewpoint is superior to the local viewpoint and give an example of when the local viewpoint fails to maximize the value of the firm.

Question

Quizplus · Accepted Answer

The Answer is A project might have a positive NPV from the local viewpoint, but fail to consider relevant cash flows from the parent viewpoint. For example, a positive NPV project in one country may result from the erosion of revenues in another. A local manager would not necessarily be expected to be aware of such erosion. It may not be possible to remit all or part of the local cash flows to the parent company and reinvestment opportunities in the local economy may be inferior to what the parent could do elsewhere, thus, a less than maximum use of funds. Political and exchange rate risk add to the uncertainty of cash flows and thus increase the required rate of return by stockholders. Cash flows may be more difficult to estimate especially long-term cash flows in lesser-developed countries.

The Authors Highlight a Strong Theoretical Argument in Favor of Analyzing