CHAPTER 17
Capital Budgeting for the Multinational Corporation

EASY (definitional)

17.1 The _______ is defined as the present value of future cash flows discounted at the project’s cost of capital minus the initial net cash outlay for the project.
a) net present value
b) equity-adjusted present value
c) cost of capital
d) value additive principle

Ans: a
Section: Net present value
Level: Easy

17.2 The most desirable property of the NPV criterion is that it evaluates
a) investments in the same way as the company’s subsidiaries
b) new market innovations that are simple to identify
c) investments the same way as the company’s shareholders
d) competitive advantages of the firm realistically

Ans: c
Section: Net present value
Level: Easy

17.3 When the introduction of a new product takes sales away from the firm’s existing products, it is known as _______.
a) cannibalization
b) sales creation
c) transfer pricing
d) opportunity cost

Ans: a
Section: Cannibalization
Level: Easy

17.4 When evaluating an investment, the MNC should consider the _______ cash flows generated by the project.
a) total
b) variable
c) incremental
d) fixed

Ans: c
Section: Incremental cash flows
Level: Easy

17.5 The _______ at which the company’s products or inputs are traded internally can significantly cause errors in evaluating the profitability of proposed investments.
a) export licenses
b) transfer prices
c) opportunity costs
d) market prices

Ans: b
Section: Transfer pricing
Level: Easy

17.6 If all funds in a project are expected to be blocked by government action in perpetuity, the value of the project is _______.
a) limited
b) unlimited
c) zero
d) difficult to determine

Ans: c
Section: Blocked funds
Level: Easy

17.7 __________ such as better quality, faster time to market, and higher customer satisfaction can have a significant impact on corporate cash flows.
a) Intangibles
b) Transfer prices
c) Economies of scale of distribution
d) Value additivity

Ans: a
Section: Accounting for intangible benefits
Level: Easy

17.8 In capital budgeting what matters is not the project’s total cash flow per period, but the _______ cash flows generated by the project.
a) sales-creating
b) incremental
c) base-case
d) parent

Ans: b
Section: Incremental cash flows
Level: Easy

MEDIUM (applied)

17.9 A foreign project that is _______ when valued on its own can be _______ from the parent firm's standpoint.
a) profitable, unprofitable
b) unprofitable, profitable
c) appreciated, depreciated
d) depreciated, appreciated

Ans: a
Section: Issues in foreign investment analysis
Level: Medium

17.10 Given the differences that are likely to exist between parent and project cash flows, the relevant cash flows to use in project evaluation are the
a) incremental worldwide cash flows received by the parent
b) incremental worldwide project cash flows
c) incremental worldwide project cash flows that can be repatriated to the parent
d) total worldwide cash flows generated by the project

Ans: a
Section: Parent versus project cash flows
Level: Medium

17.11 Many multinationals are now making small investments in Eastern Europe. These investments
a) may be valued using conventional discounted cash‑flow analysis
b) will be overvalued using conventional discounted cash‑flow analysis because of their high risks
c) should be valued using an expanded internal rate of return value rule that considers the attendant options
d) are best valued by using the payback period method

Ans: b
Section: Adjusting the discount rate of payback period
Level: Medium

17.12 Which of the following is NOT a method for incorporating the additional political and economic risk into foreign investment analysis?
a) shortening the minimum payback period,
b) raising the required rate of return of the investment
c) adjusting cash flows to reflect the specific impact of a given risk
d) hedging the expected