Global Business Management in Japan

Capital budgeting for foreign investment analysis should incorporate three important factors:
Political risks: The Company's exposure to political risk is a function of government actions in Japan and the impact of those actions on company's cash flows.

Inflation: The effect of inflation on cash flows must be estimated
Exchange rate changes: The impact of exchange rate on cash flows must be estimated.

The investment should also incorporate the additional risks that could be encountered in Japan.
In order to maximize value, managers must accept the project that returns a positive NPV. However the NPV method eliminates the time element and assumes a constant discount rate over time. This assumption might not be true for an American firm looking for launching its product in Japan. The firm might face violations of assumptions underlying NPV, or there might be high risk associated with the investment. IRR on the other hand would not be able to provide a stable rate of return as the cash flows are expected to be inconsistent. Hence NPV and IRR, though provide a traditional view of the investment, are not sufficient for making an international investment.

Many Japanese manufacturers make little or no use of NPV or IRR in evaluating proposed investments. They use simple return on investment or payback techniques rather than sophisticated discounted cash flow procedures like NPV and IRR. While it is important to make NPV and IRR as attractive as possible to improve the chances of project's approval, it is equally important to consider many other factors that can affect the marketing approach of the company. Things such as current economic conditions, the time of the year, and the amount of internal competition for money would influence the decision more than NPV or IRR.

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