MNC Parent’s Perspective Why should capital budgeting for subsidiary projects be assessed from the parent’s perspective?

MNC Parent’s Perspective Why should capital budgeting for subsidiary projects be assessed from the parent’s perspective?

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December 31, 2021
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MNC Parent’s Perspective

Why should capital budgeting for subsidiary projects be assessed from the parent’s perspective? What additional factors that normally are not relevant for a purely domestic project deserve consideration in multinational capital budgeting?

Answer and ExplanationSolution by a verified expert

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Planning process for determining a long term investment worthiness is called capital budgeting.

Explanation
Capital budgeting of the projects done by the subsidiary companies should be assessed from the viewpoint of the parent company because investment is allocated by the parent company and it is possible that a particular project is feasible from the viewpoint of the subsidiary company and not feasible from the viewpoint of the parent company.

The additional factors that are relevant for the multinational capital budgeting and irrelevant for the domestic capital budgeting are the exchange rates, demand of the product in foreign, and currency restrictions. Fluctuation in exchange rate of one currency effects the other currency by which the cash flows of the company change.

Verified Answer
Parent companies should assess the subsidiary project funds by using capital budgeting because the funds that are for project and the revenue generated by the subsidiary company belongs to the parent company.

The additional factors that must be taken into consideration in multinational capital budgeting are exchange rates, foreign demand, and currency restrictions.

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