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ACCA Strategic Professional · Advanced Financial Management · International investment and financing decisions

A parent evaluates a foreign project whose cash flows may be blocked from remittance. Which treatment is most appropriate when the host government restricts dividend remittances so that cash is retained locally until year 5?

Appraise only cash flows the parent can actually receive. Blocked funds should be modelled as reinvested locally at the available rate until released, then converted and discounted at the parent's required return. Ignoring restrictions overstates value, while discarding the funds altogether understates it because they are eventually remitted.

  1. AIgnore the restriction because the cash is still owned by the subsidiary
  2. BInclude cash flows only when they can be received by the parent, or value the blocked funds by reinvestment at the local rate and then remit, discounting at the parent's rateCorrect
  3. CIncrease the discount rate by the host country's inflation only
  4. DTreat blocked funds as lost and exclude them entirely from the appraisal

Explanation

Relevant cash flows are those available to the parent. Blocked funds can be assumed reinvested locally at the available rate until release, then converted and discounted at the parent's required return. Ignoring the restriction overstates value; excluding the funds entirely understates it as they are eventually remitted.

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