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Payback period, credit policy, netting devices, MNE funds

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1. A project has the following after-tax cash flows:

Year Cash Flow
0 -$1,000
1 400
2 300
3 400
4 200

What is this project's payback period?

a. 2.00 years

b. 2.25 years

c. 2.50 years

d. 2.75 years

2. Setting an appropriate credit policy is often more of a challenge in a foreign market than in a domestic setting for many reasons. These reasons include which of the following statements?

a. The credit period needs to be matched against the cash cycle of customers and the availability of local credit sources, but these factors are more difficult to assess in unfamiliar markets.

b. Particularly in emerging markets, reliable data may not be available to assess the creditworthiness of customers, and cultural characteristics determine the willingness to pay when times are tough and money is needed for other expenses.

c. People in different countries react differently to various kinds of collection mechanisms because of their cultural characteristics, with aggressive collection efforts alienating people in some countries while being absolutely necessary in other countries to collect amounts owed.

d. All of the statements above are reasons credit policy is more of a challenge abroad than at home.

3. Bilateral and multilateral netting are devices that allow the MNE to do which of the following?

a. Use its internal corporate network to reposition funds among the operating units without incurring significant transactions costs or running afoul of blockage restrictions.

b. Minimize transactions costs for intracompany payables and receivables management by using accounting entries rather than a physical flow of funds to debit/credit the relevant accounts on the accounting books of each subsidiary involved in the transaction.

c. Circumvent strong foreign exchange and capital restrictions in countries that have these restrictions by flowing only the net payable out of the country or the net receivable into the country.

d. All of the statements above are uses of netting.

4. The blockage of global funds transfers is a fact of life that MNEs must manage. The reasons governments block funds include all except which of the following statements?

a. To manage the country's foreign exchange reserves and currency's value.

b. To stimulate local investment and increase capital availability.

c. To encourage imports.

d. To increase an MNE's commitment to the local economy.

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Solution Preview

1. A project has the following after-tax cash flows:
Year Cash Flow
0 -$1,000
1 400
2 300
3 400
4 200

What is this project's payback period?

a. 2.00 years

b. 2.25 years

c. 2.50 years

d. 2.75 years

Payback ...

Solution Summary

Response discusses the payback period, credit policy, netting devices, and MNE funds.

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See Also This Related BrainMass Solution

Payback period and capital-budgeting technique

Study Question 9-2 on page 286

What are the criticisms of the use of payback period as a capital-budgeting technique? What are its advantages? Why is it so frequently used?

Study Problem 9-5

You are considering a project with an initial cash outlay of $80,000 and expected free cash flows of $20,000 at the end of the year for 6 years. The required rate of return for this project is 10 percent.

A. What is the project's payback period?

b. What is the project's NPV?

C. What is the project's PI?

D. What is the project's IRR?

Study Problem 9-18

(Capital rationing)The Cowboy Hat Company of Stillwater, Oklahoma, is considering seven capital investment proposals, for which the funds available are limited to a maximum of $12 million. The projects are independent and have the following costs and profitability indexes associated with them.

Project Cost Profitability Index
A $4,000,000 1.18
b 3,000,000 1.08
C 5,000,000 1.33
D 6,000,000 1.31
E 4,000,000 1.19
F 6,000,000 1.20
G 4,000,000 1.18

A. Under strict capital rationing, which projects should be selected?

B. What problems are there with capital rationing?

My textbook for this class is Foundations of Finance by Keown, Martin, Petty, Scott Jr. The fifth edition.

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