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Transcript of ifm project
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8/7/2019 ifm project
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INTERNATIONAL PROJECT
APPRAISAL
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RECENT GLOBAL TRENDS
FDI has been the major driving force towardsglobalization
Cross border M&A have also added to the CAUSE
Acquisitions bring major benefit
1)Existing customers
2)Foothold in destination market
4)Niche technologies to the company
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SOME OF THE APPROACHES TO VALUE
A DOMESTIC INVESTMENT
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ADJUSTED PRESENT VALUE(APV)
FRAMEWORK
Its a two step process:
1)Evaluate the project as if it is financed entirely by
equity .The rate of discount is the required rate of
return on equity corresponding to the risk class of
the project.
2)Add the present values of any cashflows arising
out of special financing features the rate of discount
should reflect the risk assoicated with each of the
cash flows.
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PROJECT APPRAISAL INTHE INTERNATIONAL
CONTEXT
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MAIN HURDLES DIFFERENTIATING A
FOREIGN PROJECT
EXCHANGE RATE AND CAPITAL MARKET
SEGMENTATION
POLITICAL OR COUNTRY RISK
INTERNATIONAL TAXATIONBLOCKED FUNDS
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EXCHANGE RATE RISK AND CAPITAL
MARKET SEGMENTATION
Since cashflows from a foreign project are
in foreign currency and therfore subject to
forex risk.
How to incorporate this in project valuation?Also what is the appropriate cost of capital
when the host and home country forex
markets are not integrated?
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POLITICAL OR COUNTRY RISK
Assets allocated abroad are subject to risk ofappropriation or nationalization by the host country govt
.Also there may be changes in withholding taxes,
remittances by the subsidiary to the parent.
Hence the main issue lies in incorporating these risks in
evaluating the project??
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INTERNATIONAL TAXATION
In most of the cases there might be the situation ofwithholding taxes on dividends and other income remitted
to the parent.
In addition, the home country government may tax this
income in the hands of the parent.
If double taxation avoidance treaty is there ,the parent may
obtain special credit for the taxes abroad.
There is also a related issue of transfer pricing which may
enable the parent to furthur reduce the overall tax burden.
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BLOCKED FUNDS
Sometimes , a foreign project can become an attractiveproposal because the parent has some funds
accumulated in a foreign country which cant be taken
out .
Investing these funds locally in a subsidiary or a JV may
then represent a better use of blocked funds.
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REASONS FORCONSIDERING INTRA-
CORPORATE FINANCING
FROM EXTERNAL FINANCING
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THE THREE REASONS!!!
1)Intra corporate financing effects can be
estimated separately from external financing.
2) The nature of internal financing arrangements is
sensitive to the particular features of the tax laws in
the host and home country3)It forces the company to keep in mind that intra-
corporate financing impinges only on the allocation
of the profits between the parent and the subsidiary
and not a net gain or loss.
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EXAMPLE:
Titus ltd is considering a proposal to set up a fully owned manufacturing andsales subsidiary in Zimbabwe to serve the African and Middle-eastern
markets as well as to make a foray into the European market . Proposed
Quartz plant in Zimbabwe
Intial inv=Z$ 50,000,000
Balance of Z$ 50,000,000 in a local bank from its earlier export sales .this
can be repatriated to India after paying 48% tax.Comparable watches imported from europe and japan are currently sold at
Z$180 per watch.
The operating cost are estimated to be
Materials : Z$120.00 per watch
Labour : Z$25.00 per watch
Selling and other expenses : Z$ 5.00 per watch