Capital Budgeting for the Multinational Corporation

Publisher Summary This chapter focuses on the capital budgeting for the multinational corporation. Substantial differences can exist between project cash flows and cash flows back to the parent firm because of tax regulations and exchange controls. Many project expenses such as management fees and royalties are returns to the parent company. In addition, the incremental revenue contributed to the parent MNC by a project can differ from total project revenues if the project involves substituting local production for parent company exports. In general, incremental cash flows to the parent can be found by subtracting worldwide parent company cash flows from post-investment parent company cash flows. Given such differences, the question arises as to the relevant cash flows to use in project evaluation. The actual tax on remitted funds also depends on the transfer mechanism used, including adjustments in transfer prices, dividend flows, fee and royalty charges, and intracompany loan and credit arrangements.