ABSTRACT
Project evaluations, generally referred to as capital budgeting, are discussed in a domestic context in almost all introductory corporate finance courses. However, in the international arena, capital budgeting involves complex problems that are not shared in a domestic context. These include, for example, the dependence of cash flows on capital structure – the amount of debt versus equity used in company financing – because of cheap loans from foreign governments. This makes the cost of capital to the corporation different from the opportunity cost of capital of shareholders, where the latter is the correct discount rate. There are also exchange-rate risks, country risks, multiple tiers of taxation, and sometimes restrictions on repatriating income. We will show the conditions under which some of the more complex problems in the evaluation of overseas direct investments can be reduced to manageable size.
