ACCA Strategic Professional · Advanced Financial Management · International investment and financing decisions
A UK-based multinational is appraising a project in a foreign country using the adjusted present value (APV) method. Which discount rate is normally applied to the project's operating cash flows in the base-case NPV?
The base-case NPV in APV is discounted at the ungeared (all-equity) cost of equity reflecting the project's business risk. Financing effects such as tax shields are valued separately, so using the WACC would double count the debt tax benefit.
- AThe project's cost of equity as if the project were all-equity financedCorrect
- BThe group's weighted average cost of capital including the tax shield
- CThe risk-free rate adjusted for inflation differentials
- DThe after-tax cost of debt used to finance the project
Explanation
APV first values the project as if financed wholly by equity, using an ungeared cost of equity that reflects the project's business risk. Financing side-effects such as the tax shield are then added separately. Using the WACC would double count the tax shield, which is why option B is wrong.
Did you get it right without looking?
One question tells you little. A timed set on International investment and financing decisions shows your real accuracy, how long you take and where you lose marks.
More International investment and financing decisions questions
- Kestrel Inc, a US company, has a project in Poland. Its US dollar discount rate is 9%. Expected inflation is 5% in the US and 3% in Poland (…
- A parent evaluates a foreign project whose cash flows may be blocked from remittance. Which treatment is most appropriate when the host gove…
- A group wants to raise long-term funds for a subsidiary in an emerging market with a restricted currency and volatile inflation. Which appro…
- Which of the following is a recognised reason why the adjusted present value (APV) method is often preferred for appraising a foreign projec…
- A multinational's overseas subsidiary is financed with a $10 million loan from the parent at 5% instead of equity. The subsidiary's tax rate…
- Which statement best describes why a multinational should normally use a project-specific discount rate rather than its group weighted avera…