# Discount Rate MNC

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The "discount rate" is a key factor to consider when comparing potential projects or investments by the MNC. Assume you are the task manager in charge of assessing the location of a new manufacturing facility to be located in Chile. Your accountants have "crunched the numbers" across a 30 year horizon, but you must decide which specific percentage to use as your discount rate to assess the profitability of the project. Choose and justify your chosen discount rate

and

Summarize an article (or series of articles) regarding the investment decision of a MNC made during the past five years. What key concepts from the assigned reading apply?

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Step 1

The specific percentage to use as the discount rate is 9.53 percent. The discount rate has been calculated by taking the expected rate of return on equity and the lending interest rate in Chile. We have not been given the name of the company nor the industry. We assume that the capital structure will be 2:1. For calculating the expected return on equity we take the Chile Stock Market Index (IPSA). The index was 18,227. This index is 27 years old. Since the accountants have crushed numbers over a 30 year period, the average increase of index over 27 years is 675.04. We divide 18,227 by 27 years to get it. Next we take the median of the index. This is 9,125. This is the average of the index over 27 years. We next divide 675.04 by 9,125 and multiply it by 100 and we get the average rate of 7.4%. This is assumed to be the expected return on equity. Next we find the cost of debt. This is 10.06 percent according to 2012 figures (World Bank). Since we intend to have a debt to equity ratio of 2:1, we multiply 10.06 by 2 and add it to 7.4%. We get 28.59. This we divide by 3 remember 2+1, we get 9.53%. This is our specific discount rate. The discount rate ...

#### Solution Summary

This solution explains the calculation of discount rate and how MNC's make investment decisions. The sources used are also included in the solution.

Country Risk Analysis

1.)

The new manufacturing facility destined for Chile, for which you deduced an appropriate "discount rate" earlier, has not yet been launched. Several on your team are concerned with the political and regulatory risk associated with locating in Chile. One sub-group of your team suggests considering Nigeria, instead of Chile, and another sub-group believes that Vietnam should be considered. The third group believes Chile is a fine choice.

But it is your decision as the team leader to suggest your final choice to upper-management. Based on political risk analysis, which of three (Chile, Nigeria, Vietnam) would you recommend?

2.)

Summarize an article (or series of articles) regarding the country risk engaged by an MNC during the past five years. What key concepts from the assigned reading apply?

Each Response needs to be at least 350 words

The new manufacturing facility destined for Chile, for which you deduced an appropriate "discount rate" earlier, has not yet been launched. Several on your team are concerned with the political and regulatory risk associated with locating in Chile. One sub-group of your team suggests considering Nigeria, instead of Chile, and another sub-group believes that Vietnam should be considered. The third group believes Chile is a fine choice.

But it is your decision as the team leader to suggest your final choice to upper-management. Based on political risk analysis, which of three (Chile, Nigeria, Vietnam) would you recommend?

***Follow up from the discount rate solution from last week***

(Below)

The specific percentage to use as the discount rate is 9.53 percent. The discount rate has been calculated by taking the expected rate of return on equity and the lending interest rate in Chile. We have not been given the name of the company nor the industry. We assume that the capital structure will be 2:1. For calculating the expected return on equity we take the Chile Stock Market Index (IPSA) and the index was 18,227 which the index is 27 years old. Since the accountants have crushed numbers over a 30 year period, the average increase of index over 27 years is 675.04. We divide 18,227 by 27 years to get it.

Next we take the median of the index which is 9,125. This is the average of the index over 27 years. We next divide 675.04 by 9,125 and multiply it by 100 and we get the average rate of 7.4%. This is assumed to be the expected return on equity. Next we find the cost of debt. This is 10.06 percent according to 2012 figures (World Bank). Since we intend to have a debt to equity ratio of 2:1, we multiply 10.06 by 2 and add it to 7.4% and get 28.59. This we divide by 3 remember 2+1, we get 9.53%. This is our specific discount rate.

The discount rate is very important. It is the number that is used to convert the value of the expected future cash flows into their present value. This is necessary because of time value of money and the value of money depends on when it is expected to be paid. The discount rate is important because once the MNC projects the free cash flow for a period of time, it is necessary to find out what these cash flows are worth today. The discount rate must be appropriate so that it can be used to calculate the net present value of the cash flows.

In case of Chile during the last one year the IPSA index declined. However, the IPSA index has over its life period increased. The increase over 27 years is used to find out the expected return on equity.

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Summarize an article (or series of articles) regarding the country risk engaged by an MNC during the past five years. What key concepts from the assigned reading apply?

Examples:

1. Company and political risk

2. Inc. and political risk

3. [MNC] and political risk

4. [MNC] and country risk

5. Exposure to political risk

6. Exposure to country risk

7. Country risk rating

8. Risk and foreign project

9. Risk and foreign subsidiary

10. Multinational and government takeover