2a. How does forecasting cash
2a. How does forecasting cash flows for a multinational projectdiffer from forecasting cash flows for a US based project? b.Describe one way the required return for the project located in aforeign country can be determined if the required return for asimilar project located in the US is known. c. When determining therequired return for a capital budgeting project located in aforeign country, why does it matter whether the capital market inthat foreign country is integrated with the world market or issegmented? How does the required return in a segmented marketdiffer from that in an integrated market?
Answer:
A. Forecasting cash flows is one of the primary sources of measure ofprofitability. Projects that run in multiple nations have differentways of forecasting cash flows than America based projects as themultinationals have to consider many things:
1. the state of economy of all the different countries in whichit operates like stage of business cycle at with the economy of thecountry currently is , interest rates, political situation andstability, public trends .etc.
2. The relations between the host country and the mother countrythat include both financial and non-financial aspects
Financial being the exchange rates i.e. the priceat which the foreign currency is available in terms of localcurrency and vice versa. And,
Non-financial majorly being the attitude of the local peopletoward the home country
B. Two project one us based and one based inforeign country can have similar required rate of returns
- when the stage andthe status of the economy of the host country is similar to theUS
Take for example (per say) Germany and US. Both are developednations and are major drivers of the world economy thus when onecountry experiences a recession or an expansion it is very likelythat the other country is already or will be experiencing thesame.
This interdependence/relation between two similar countries willresult in the two have similar if not same required rate of return.
C. No country alone has the abilityto affect the world market all by itself. The world market alwayshas some sort of impact on every market be it local or foreign (forthe multinationals). This impact cannot be neglected whilecalculating anything. Thus the world market is integrated with theforeign market. To nullify this effect of world market on theforeign market the multinationals sometimes segregate the worldmarket from the foreign market.
D. the required return in a segmented marketdiffers from that in an integrated market as it only includes therate of return required solely in the foreign country. Requiredrate of return is the measurement of risk, which will differ fromcountry to country.thus will be different from when a particularcountry (foreign, segregated) from world market (as awhole/integrated)
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