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Financial Risk of Capital Budgeting Decisions

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Briefly explain how the following items affect the capital budgeting decisions of multinational companies: (a) exchange rate risk; (b) political risk; (c) tax law differences; (d) transfer pricing; and (e) a strategic rather than a strict financial viewpoint.

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A capital expenditure is an outlay of cash for a project that is expected to produce a cash inflow over a period of time exceeding a year. Examples of projects include inverstment in property, plant, and equipment, research and development projects, large advertising campaigns, or any other project that requires a capital expenditure and generates a future cash flow.

Because capital expenditures can be very large and have a significant impact on the financial performance of the firm, great importance is placed on project selection. This process is called capital budgeting.

Capital budgeting decisions of multinational companies will affect the exchange rate risk because this risk that a business' operations or an investment's value will be affected by changes in exchange rates. For ...

Solution Summary

The financial risk of capital budgeting decisions is analyzes for multinational companies. The exchange rate risk, political risk, tax law differences, transfer pricing and strategic rather than strict financial viewpoint are explained.