RSM333H1 Lecture Notes - Lecture 5: Foreign Exchange Controls, Foreign Exchange Risk, Tax Shield
Document Summary
Week 5: capital budgeting and cash flow estimation. Account for different time horizons: chain replication approach: compare projects with unequal lives. Find time horizon into which all project lives under consideration divide equally. Assume each project repeats until it reaches this horizon: equivalent annual npv approach: compare projects by finding npv of individual projects. Determine annual annuity that is economically equivalent. Eanpv = project npv / (1 - (1+k)-n)/k. 13. 4 capital rationing: firms face capital budget constraints. Capital rationing: total amount of investment capital available is restricted. Must be allocated among available investment projects. Can hedge uses financial instruments or avoid by moving production to same jurisdiction. Difficulties: political risk, foreign exchange controls, legal/regulatory issues, local competition has privileged access, foreign exchange risk as revenue, double taxes. Taxed abroad and domestically: financing in poorly developed local markets. Depreciation and amortization: calculated using declining method, half-year rule.
