Chapter 18

Question 1

Why is capital budgeting analysis so important to a firm?

Answer 1

Because it ensures capital is allocated to projects with positive NPV or APV, contributing to shareholder wealth, and helps determine the firm’s long-run efficiency and competitiveness due to the large, strategic nature of such investments.

Question 2

What is the difference between doing capital budgeting from the parent’s vs. the subsidiary’s perspective?

Answer 2

A project may appear profitable from the subsidiary’s view, but not from the parent’s, due to issues like remittance restrictions or currency appreciation, which reduce the value of cash flows when converted to the parent’s home currency. The parent must prioritize shareholder value.