lecture 6 International Investment Appraisals

These flashcards cover key concepts and considerations in international investment appraisals, focusing on risks, exchange rates, and financial strategies.

What is the main thing to check in global investment?

To look at risks and things that change money values and cash flows.

Why do UK companies move their business abroad?

To find new customers, make more money, and face less competition.

Why are exchange rates important?

They help us change money and see how much an investment is worth.

What is a remittance?

Money that a branch in another country sends back to the main office.

What does NPV stand for and what is the basic formula?

Net Present Value.

Formula:
NPV = \sum{t=1}^{n} \frac{CF{t}}{(1+k)^{t}} - I_{0}

• CF_{t}: Cash flow at time t

• k: Discount rate

• I_{0}: Initial investment

How do you calculate NPV using the 'Home Currency' way?

1. Estimate foreign cash flows (CF_{f}).
2. Predict future exchange rates (S_{t}) using PPP or Forward rates.
3. Convert cash flows to home currency: CF{h} = CF{f} \times S_{t}.
4. Discount the home cash flows using the home discount rate (k_{h}).

Formula:
NPV{h} = \sum \frac{CF{f,t} \times S{t}}{(1+k{h})^{t}}

How do you calculate NPV using the 'Foreign Currency' way?

1. Estimate foreign cash flows (CF_{f}).
2. Discount these at the foreign discount rate (k_{f}) to find foreign NPV.
3. Convert the total foreign NPV into home currency using the current spot rate (S_{0}).

Formula:
NPV{h} = \frac{NPV{f}}{S_{0}}

What is the formula for absolute Purchasing Power Parity (PPP)?

It suggests the exchange rate between two currencies should equal the ratio of the price levels (P) of a fixed basket of goods.

Formula:
S = \frac{P{base}}{P{foreign}}

How do you calculate the future exchange rate using Relative PPP?

Relates the change in exchange rates to inflation (i) differences.

Formula:
S{1} = S{0} \times \frac{1 + i{h}}{1 + i{f}}

• S_{1}: Expected spot rate

• S_{0}: Current spot rate

• i_{h}: Home country inflation

• i_{f}: Foreign country inflation

What is the calculation for the 'Currency Spread' percentage?

The cost of swapping money expressed as a percentage of the price.

Formula:
\text{Spread \%} = \frac{\text{Ask Price} - \text{Bid Price}}{\text{Ask Price}} \times 100

What is FDI?

When a person or company puts money into a business in another country.

What causes political risk?

Changes in a country's government or its rules.

How do exchange rates affect money sent home?

They change how much money the main office actually gets back.

What is capital rationing?

Setting a limit on how much money can be spent on projects.

Why should we check local tax rules?

Taxes change how much profit you can keep and send home.

What is the difference between direct and indirect quotes?

Direct shows the price of foreign money; indirect shows the price of home money.

Why is inflation different in each country?

Because of how the economy works and what the government does.

Why use theories to guess future exchange rates?

To help investors predict if money values will go up or down.

What is arbitrage?

Buying something cheap in one place and selling it for more in another.

Why join a 'new' or emerging market?

To get resources and make more money where others haven't gone yet.

What are the ways a company can work abroad?

Selling goods (exporting), letting others use their name (franchising), or teaming up (joint ventures).

How do extra costs affect profits?

Fees and costs can make the final profit smaller than expected.

What is a common problem when swapping money?

Banks charge an extra fee or 'spread' when you swap currencies.

What makes a country good for investing?

If the government is steady, laws are fair, and there are many resources.

Why might a company have a money limit for projects?

Because they only have a certain amount of total cash to spend.

What is a residual asset value?

What the equipment or building is worth at the very end of the project.

How do tariffs affect trade?

They are like a tax that makes goods from other countries more expensive.

What is the risk of money values changing?

It can change how much profit a company makes when they swap money back.

What is a forward exchange rate?

A price for swapping money that both sides agree on for a future date.

What can you do if markets are scary or changing fast?

Use 'hedging' to protect your money from big changes.

What happens if a country has high inflation?

Its money loses value and people can buy fewer things.

What is geographic diversification?

Investing in many different countries so you don't lose everything if one fails.

Why check rates when sending profit home?

To see if the investment was actually worth it after changing the money back.