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