International Capital Budgeting

Capital budgeting is a process of investigation and analysis that leads to a key financial decision for both purely domestic firms and MNCs. More broadly, capital budgeting is defined as the process of analyzing capital investment opportunities and deciding which, if any, to undertake.

While calculating the cash flows for international capital budgeting the following accounts must be taken into accounts while calculating the incremental cash flows.


Sometime the new projects causes the existing cash flows to diminish because of the new projects ; these diminish cash flows are considered as the cash out flows for the new projects and these cash out flows are deducted in the final analysis ; this is known as cannibalization.

Fees and Royalties

Some time you have to pay extra fee of license and other royalties to domestic government these are considered as cash out flows.

Opportunity Cost

Sometimes the opportunity cost is also considered as the cash out flows.

Transfer Pricing

In the international transfer major portion of some product is manufactured in some other subsidiary and the host country little value to finished product. The parent country and the host country are involved in transfer pricing.

So all this discussion implies that:

Incremental Cash flow of International = Global corporate Cash flow with projec t- Global corporate Cash flow without project.

Benefits of International Capital Budgeting

  • Valuable learning experience.
  • Knowledge
  • Globalization etc.

Major Issues in International Capital Budgeting

Two major issues in consideration while investing internationally.

  1. “Parent against the project cash flow” the analyst estimates the relevant cash flows or the incremental cash flow of the particular project when the subsidiary transfer or subsidiary remits that cash flow to the parent company.
  2. “How to account for the increased economic and political risk of project.”

financial management

December 07, 2018