Page 228 - DMGT549_INTERNATIONAL_FINANCIAL_MANAGEMENT

Unit 13: Cross-border Capital Budgeting

This allows the required flexibility, to be accommodated in the analysis of the foreign Notes
project

The APV model is a value additivity approach to capital budgeting, i.e., each cash flow as
a source of value is considered individually.

Caselet Effective Interest Rate

he Vodafone Corporation arranged a one-year, $1.5 million loan to fund a foreign
project. The loan was denominated in Euros and carried a 10 percent nominal rate.
TThe exchange rate at the time of the loan was .6799 euros per dollar but dropped to
.6455 francs per dollar by the time the repayment came due. What effective interest rate
did Vodafone end up paying on the foreign loan?
Solution:

Loan amount in $ = 1.5 million
Loan amount in Euros = 1.5 × 0.6799 million
Nominal rate = 10% = 0.1 × 1.5 × 0.6799 Euros
Effective interest rate = 0.1 × 1.5 × 0.6799/(0.6455 × 1.5) = 10.53%
Source: International Financial Management, Madhu Vij, Excel Books.

Task The Vodafone Corporation arranged a one-year, $1.5 million loan to fund a foreign
project. The loan was denominated in Euros and carried a 10 percent nominal rate. The
exchange rate at the time of the loan was .6799 euros per dollar but dropped to .6455 francs
per dollar by the time the repayment came due. What effective interest rate did Vodafone
end up paying on the foreign loan?

Self Assessment

Fill in the blanks:
9. The NPV method is important because it expresses in absolute terms the benefit of the
project to the …………………… .
10. …………………… is defined as the present value of future cash flows discounted at an
appropriate rate minus the initial net cash outlay for the projects.
11. When the NPV of the project is equal to …………………… , the finance manager may or
may not accept the project.

12. The benefit of APV is that it breaks the problem down into the value of the project itself,
as if it is totally …………………… financed and the value of the debt financing.
13. …………………… is defined as the discount rate that equates the present value of expected
future cash inflows with the present value of the project’s initial cash outflows.
14. If a company accepts a project with a …………………… NPV, the wealth of the stockholders
improves.
15. The process of evaluating specific long-term investment decisions is known as the
…………………….

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