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CA Final · Advanced Financial Management · International Financial Management

A project's cash flows in a foreign country are subject to blocked remittance of profits for three years. How should an Indian parent treat this in capital budgeting?

The parent should value only cash flows that can actually be remitted to it, adjusting timing or the discount rate for blocked funds. Counting blocked profits as freely available overstates the project's NPV, because the parent cannot use that money until the restriction ends.

  1. AInclude only cash flows that can be remitted to the parent, or adjust the discount rate or timing for blocked fundsCorrect
  2. BIgnore the restriction because profits remain within the group
  3. CTreat all blocked funds as received in Year 0
  4. DDiscount blocked funds at the risk-free rate and exclude all others

Explanation

Parent's perspective values cash flows actually available to the parent. Blocked funds are delayed or valued after reinvestment return, so timing and risk must be adjusted. Ignoring the restriction overstates NPV.

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