投資評估方法

成員：李健、王純?nèi)稹⒅煨l(wèi)、申欣

陳龍、方兆運、王棟坤、劉恒Chapter4:CompoundedCashFlow

Methods

Chapter5:SelectedFurthenApplicationsofInvestmentAppraisalMethods

14九月2023CONTENTS4.1CompoundValue(CV)Method4.2CriticalDebtInterestRate(CDIR)Method4.3VisualisationofFinancialImplications(VoFI)Method5.1IncomeTaxesandInvestmentDecisions5.2TheAssessmentofForeignDirectInvestments4.1CompoundValueMethodThecompoundvalue(CV)methodisadynamicinvestmentappraisalmethodthatusesthecompoundvalueasitstargetmeasure.Thecompoundvalueistheoverallnetmonetarygainorlossresultingfromtheinvestmentprojectandisrelatedtotheendofitseconomiclife.4.1CompoundValueMethodThreeassumptions:Differentinterestrates:adebtinterestrateforborrowingsandacreditinterestrateforfinancialinvestmentsUnlimitedamountscanbeborrowedorinvestedattheserates

Interestratesareassumedtobeindependentoftheamountborrowedorinvested4.1CompoundValueMethod4.1.1ProhibitedaccountbalancingSeparateaccountsareestablishedforthenetcashinflowsandnetcashoutflows.Theinflowsearnthecreditinterestrate(c)(CVT+)andtheoutflowsincurthedebtinterestrate(d)(CVT-).Thecompoundvaluesattheendoftheplanningperiodare:4.1CompoundValueMethod4.1.2MandatoryaccountbalancingOnlyoneaccount(CV)areassignedtowhichallcashinflowsandoutflows(NCFt).iftheproject-specificfinancialassetsatbeginningoftheperiod(CVt-1)arenegative,usingthedebtinterestrate(d)orusingthecreditinterestrate(c)ifCVt-1ispositive.4.1CompoundValueMethodTwoconcepts:Absoluteprofitability:isachievedifaninvestmentproject'scompoundvalueisgreaterthanzero.Relativeprofitability:isachievedifaninvestmentprojecthasahighercompoundvaluethanthealternativeinvestmentproject(s).4.1CompoundValueMethodUsingthemandatoryaccountbalancingassumption:CVt=32423.80Usingtheprohibitedaccountbalancingassumption:ProjectA:Thedebtinterestrate(d)is10%;Thecreditinterestrate(c)is6%Example14.1CompoundValueMethodAssessmentofthemethod:TheCVmethodevaluationislargelythesameasthatpresentedfortheNPVmethod.TherequireddataareidenticalexceptthattheCVmethodrequiresbothdebtandcreditinterestrates.4.1CompoundValueMethodAssessmentofthemethod:But,somedifferencesdoexistbetweenCVandNPV:TheCVmethodavoidstheassumptionofaperfectcapitalmarketandwithittheuseofauniformdiscountrate.TheCVmodelassumptionsaremorerealisticthanthoseoftheNPVmethod.However,ifdebtandcreditinterestratesdeviateonlyslightlyfromeachother,theresultsofboththeCVandNPVcalculationswillbeoftenthesameinpractice.4.2CriticalDebtInterestRateMethodThecriticaldebtinterestratemethodassumesseparatedebtandcreditinterestrates.Thecriticaldebtinterestrateservesasthetargetmeasureforthismethod.Thecriticaldebtinterestrateistheratethat(withagivencreditinterestrate)resultsinacompoundvalueofzero.Aninvestmentprojectisabsolutelyprofitableifitscriticaldebtinterestrateexceedsthemarket’sdebtinterestrate.4.2CriticalDebtInterestRateMethodAnapproximationofthecriticaldebtinterestrate：TheCDIRmethodhavearelationshipsimilartothatoftheinternalrateofreturn(IRR).AninterpolationorextrapolationcanbeexecutedusingaformulasimilartotheoneusedtocalculatewiththeIRRmethod.Theaccuracyoftheapproximationdependsonthedifferencebetweenthedebtinterestratesandhowfarfromzerotheresultingcompoundvalueslay.4.2CriticalDebtInterestRateMethodApplicationofthemethod:Theabsoluteprofitabilityassessments:AbsoluteprofitabilityresultsarethesamefortheCDIRmethodastheyarefortheCVmethod,inthecaseofisolatedinvestmentprojects.4.2CriticalDebtInterestRateMethodApplicationofthemethod:Therelativeprofitabilityassessments:

Criticaldebtinterestratecomparisonsusuallyfailtoyieldmeaningfulresults,sincecapitaltie-upandeconomiclifedifferencesareassumedtobebalancedbythecriticaldebtinterestrate;

TheuseoftheCDIRmethodwithafictitiousdifferentialinvestmentisproblematic,becausetheresultingcompoundvaluedoesnotalwaysequatetothedifferencebetweenthecompoundvaluesoftheprojectsunderconsideration;TheCDIRmethodcanbeusedtoassessrelativeprofitabilityonlyinsomecases.SinceallofthesecasescanalsobeassessedusingtheCVmethod,theCDIRmethodisnotrecommendedforassessingrelativeprofitability.4.2CriticalDebtInterestRateMethodExample2(ThisexampledrawsondatausedforExample1&3)Prohibitedaccountbalancing:ProjectA:ProjectB:Acriticaldebtinterestrateof17.17%canbecalculatedinthesameway.Result:Becausethedebtinterestrateis10%,andthereforelowerthanthecriticaldebtinterestrates,bothprojectsareabsolutelyprofitable.4.2CriticalDebtInterestRateMethodAssessmentofthemethod:ThedatarequiredisthesameasfortheCVmethodandthecomputationaleffortisonlyslightlyhigher.BecausetheassumptionsoftheCVmethodreflecttherealitymoreclosely,thismethodispreferabletotheCDIRmethod.4.3VisualisationofFinancialImplicationsMethod(VoFI)Acomprehensivefinancialplanthatconsidersallcashflowsconnectedwithaninvestmentproject.TargetmeasuresfortheVoFImethodcanbecompoundvalues,innitialvalues,intermediatevalues,withdrawals.Compoundvaluesareconsideredhere,primarilybecauseoftheirclarity.4.3VisualisationofFinancialImplicationsMethod(VoFI)Twoconcepts:Aninvestmentprojectisabsolutelyprofitableifitscompoundvalueexceedstheopportunityincomevalueattheendofitseonomiclife.Aninvestmentprojectisrelativelyprofitableifitscompoundvalueexceedsthecompoundvaluesofthealternativeprojects.4.3VisualisationofFinancialImplicationsMethod(VoFI)Standardisedtablescanbeusedtoworkoutcomprehensivefinancialplans.4.3VisualisationofFinancialImplicationsMethod(VoFI)Standardisedtablescanbeusedtoworkoutcomprehensivefinancialplans.Thecomprehensivefinancialplanandcompoundvaluecalculationforaninvestmentprojectrequirethefollowingsteps:Step1:att=0theinitialoutlayoftheinvestmentprojectandallocatedinternalfundsarerecorded.Inaddition,theloanamounttoberaisediscalculatedandthestatusofloansandfinancialinvestmentsisrecorded.Step2:fort=1andeverysubsequentperiodthenetcashflowsoftheinvestmentprojectarerecorded.Interestpayments,anyborrowingorredemptionofloans,andanymakingordiscontinuationoffinancialinvestmentsiscalculatedinordertoupdatethestatusofloansandfinancialinvestments.4.3VisualisationofFinancialImplicationsMethod(VoFI)Example3Example2canbeusefullyextendedbyassumingthat20,000isavailableincash(representingtheallocatedinternalfunds)atthebeginningoftheplanningperiod.Itsalternateuseisafinancialinvestmentopportunityyielding7%interest.Theinterestrateavailablefortheshort-terminvestmentofsurplusesis6%.TofinancetheinvestmentprojectAorB–aloanwithfinalredemptionandaninstalmentloan,eachabout25%oftheinitialinvestmentoutlayareavailableat9%interestforatermoffouryears.Anyremainingfinancingcanberaisedasacurrentaccountloan(at11%interest).Allpaymentsaremadeattheperiodend,andtheinterestchargesarebasedonthecapitalemployedatthebeginningofeachperiod.4.3VisualisationofFinancialImplicationsMethod(VoFI)Example3Usingthisdata,andassumingthatsurplusesareusedfortheimmediateredemptionofthecurrentaccountloan,thecomprehensivefinancialplanforinvestmentprojectAisasfollows:ThecompoundvalueofprojectAamountsto?63,703.56.Becausethisexceedstheopportunityincomevalue(by?20,000·1.075=?28,051.03),theprojectisabsolutelyprofitable.4.3VisualisationofFinancialImplicationsMethod(VoFI)Example3TheVoFIfinancialplanforinvestmentprojectBisshowninFigure:InvestmentprojectBisalsoabsolutelyprofitable,becauseitscompoundvalue(?58,766.62)exceedstheopportunityincomevalue(whichis?20,000·1.074=?26,215.92).4.3VisualisationofFinancialImplicationsMethod(VoFI)Assessingrelativeprofitabilityrequiresdeterminingtheextenttowhichtheprojectsarecomparable,giventheirdifferencesininvestmentoutlayandeconomiclife.TheVoFImethodexplicitlyconsidersthemannerinwhichtheinitialinvestmentoutlayisfinanced.Therefore,differentinitialinvestmentoutlaysimpairprojectcomparabilityonlyifone(ormore)ofthemutuallyexclusiveprojectshasaninitialoutlaylessthantheallocatedinternalfunds.Inthatcase(notshownintheexample),anassumptionaboutasupplementaryinvestmentisneededtobalancethedifferenceintheallocatedequity.

4.3VisualisationofFinancialImplicationsMethod(VoFI)Economiclifedifferencesmustbebalancedineverycase;otherwisecompoundvaluesreferringtodifferentpointsintimewillnotbecomparable.Thecapitalavailableattheendoftheshorterinvestmentprojecthastobecompoundedbyanappropriateinterestratetobalancethelifedifferences.Intheexamplegiven,thecompoundvalueofprojectBhastobecompoundedbyafurtheryearbeforeitcanbecomparedwiththecompoundvalueofprojectA.Assuminganinterestrateof7%,thecompoundvalueofBis?62,880.28att=5(?58,766.62·1.07).BecausethecompoundvalueoftheprojectA(?63,703.56)ishigher,Aisrelativelyprofitable.4.3VisualisationofFinancialImplicationsMethod(VoFI)TheratesofreturnderivedfromtheVOFIare:Bothprojectsareabsolutelyprofitable,becausetheirratesofreturnexceedtheopportunityinterestrates.ProjectAemergesasrelativelyprofitableduetoitshigherVoFIcapitalprofitability.4.3VisualisationofFinancialImplicationsMethod(VoFI)Assessmentofthemethod:TheVOFImethodcannotassistwithoptimisingthedifferentinvestmentprojects.Sincefinancingandinvestmentpoliciesareusuallytailoredtothewholecompanyratherthantoindividualprojects,theallocationofinternalfundsandspecificloanstoindividualprojectscanbedifficult.However,thisproblemdoesnotoccur.AnadvantageoftheVOFImethodoverotherinvestmentappraisalmethodsisthatassumptionsaboutthereinvestmentofsurplusesandthebalancingofdifferencesincapitaltie-uparetransparentwithinthestandardisedtables.Overall,VOFIanalysisresultsarewellsuitedtopresentationandcontrol,sotheyarelikelytobehighlyacceptabletodecision-makers.Tobecontinued5.1IncomeTaxesandInvestmentDecisions

Taxesshouldbeincludedintheanalysisofinvestmentprojectssincetheymayaffectprojectprofitability.Theirconsiderationintheassessmentofinvestmentprojectsisillustratedhereusingboththenetpresentvalue(NPV)andvisualisationoffinancialimplications(VoFI)methods.Thefollowingdiscussionassumesthatonlytheperspectiveofthecompanyisconsidered.

5.1IncomeTaxesandInvestmentDecisions

5.1.1TaxesandtheNetPresentValueMethodInmodifyingtheNPVmethodtoincludetaxconsiderations,asimplifiedmodelvariantischosenthatconsidersonlyprofit-dependenttaxes.Therelevantprofitmeasurecanbederivedfromtheoriginalcashflowprofilemodifiedbydepreciationandthedifferencebetweentheliquidationvalueandtheremainingbookvalueofassetssoldattheendofaproject’seconomiclife.

5.1IncomeTaxesandInvestmentDecisions

5.1.1TaxesandtheNetPresentValueMethodInadditiontothepremisesoftheNPVmodel,thefollowingassumptionsaremade:Thecompanypaysprofit-dependenttaxatthesametimeastheprofitisreported:attheendofeachperiod.Taxpaymentsareproportionaltotheprofitmade.Thecompanymakesaprofitineachperiod,independentoftheprojectunderconsideration.Therefore,immediatelosscompensationispossibleineachperiodforwhichtheproposedinvestmentresultsinaloss,soalosscarryforwardisneithernecessarynorpossible.Theoriginalcashflowprofileofaninvestmentproject(beforetheinclusionoftaxpayments)remainsunaffectedbytaxes(e.g.therearenopriceincreasesasaresultoftaxation).Interestpaidtocreditorsreducesprofitandthereforereducestaxes;interestreceivedfromdebtorsraisesprofitandtaxes.5.1IncomeTaxesandInvestmentDecisions

5.1.1TaxesandtheNetPresentValueMethodInadditiontothepremisesoftheNPVmodel,thefollowingassumptionsaremade:Allcashinflowsoroutflowsresultingfromaproject–withtheexceptionoftheinitialinvestmentoutlay(s)andpossiblytheliquidationvalue–arecountedinthatsameperiodasyieldsorexpensesforthepurposesofcalculatingprofit.Theinitialinvestmentoutlayisinitiallycapitalisedinthebalancesheet.Itssubsequentdepreciationannuallyreducestheprofit,andthesale(liquidation)oftheprojectgeneratesacashflow,thatsimultaneouslymayinfluencetheprofit.

5.1IncomeTaxesandInvestmentDecisions

5.1.1TaxesandtheNetPresentValueMethodTheNPVcalculationrequirestwoadditionalstepstoaccountfortaxes:

Theoriginalcashflowprofilemustbemodifiedbypaymentsdirectlyresultingfromtaxation.:after-taxnetcashflows:rateoftaxation

:Netcashflowsbeforetaxes:theprofitchang:taxespaidinthepointintimet

5.1IncomeTaxesandInvestmentDecisions

5.1.1TaxesandtheNetPresentValueMethodTheNPVcalculationrequirestwoadditionalstepstoaccountfortaxes:

Theuniformdiscountratemustbeadjustedtorecognisetheeffectsoftaxpaidontheyieldsofalternative(financial)investments,aswellastaxdeductedfromtheinterestpaidondebtcapital(todeterminethe‘a(chǎn)fter-taxcostofdebt’)

:profit-affectingportionbeforetaxes

:notaffectedbyprofitportionbeforetaxes

:depreciation

5.1IncomeTaxesandInvestmentDecisions

5.1.1TaxesandtheNetPresentValueMethodTheNPVcalculationrequirestwoadditionalstepstoaccountfortaxes:

Theinclusionoftaxesaffectsboththecashflowprofileofaninvestmentprojectandtheuniformdiscountratethatisused.

Theuniformdiscountratetakesintoaccounttheyieldsofalternativeinvestmentopportunitiesaswellasthecostsofdebtcapital.Thisformulaissuitableforinterestyieldonalternativeinvestmentsandthecostsofdebtcapitalmustbeadjustedfortaxes

5.1IncomeTaxesandInvestmentDecisions

5.1.1TaxesandtheNetPresentValueMethodTheNPVcalculationrequirestwoadditionalstepstoaccountfortaxes:

Takingthisintoaccount,themodifiednetpresentvalue(NPV*)canbecalculatedasfollows:

5.1IncomeTaxesandInvestmentDecisions

5.1.1TaxesandtheNetPresentValueMethodExample5-1Inthecalculationsbelow,Example3-1isreconsideredincludingtaxconsiderations;Assumethattherateoftaxationtis40%andtheentireinitialoutlayvalueisdepreciatedovereachproject’slifeusinglinear(straight-line)depreciation.

5.1IncomeTaxesandInvestmentDecisions

5.1.1TaxesandtheNetPresentValueMethodExample5-1

5.1IncomeTaxesandInvestmentDecisions

5.1.1TaxesandtheNetPresentValueMethodExample5-1Themodifieduniformdiscountrateinthisexampleis4.8%(i*=i–rt·i?;0.048=0.08-0.4·0.08).ThenthemodifiednetpresentvalueNPVA*amountsto:Inthesameway,themodifiednetpresentvalueNPVB*ofthealternativeprojectBcanbecalculatedat16,696.98

Thus,bothalternativesareabsolutelyprofitable,andprojectAisrelativelyprofitable.Theassessmentsofprofitabilityinthiscaseremainidenticaltothoseachievedwithoutconsideringtaxes.

5.1IncomeTaxesandInvestmentDecisions

5.1.1TaxesandtheNetPresentValueMethodAssessmentofthemethod

ThemodeldescribedhereisbasedonthegeneralNPVmodeland,therefore,itsassessmentisbroadlyasoutlinedinSection3.2.Whatisnew,however,isthetreatmentoftaxesinthemodel.Itshouldbenotedthatonlyprofit-dependenttaxesareconsidered.

Moreproblematicistheassumptionthatonlyonetypeofprofit-dependenttaxislevied,andthatitisaproportionaltax(i.e.alinearfunctionofprofit).Inreality,differentialtaxationofprofitoccursusingseveralkindsoftaxes；Moreover,therateoftaxationisnotalwaysconstant.

5.1IncomeTaxesandInvestmentDecisions

5.1.1TaxesandtheVisualisationofFinancialImplications(VoFI)MethodTheVoFImethodexplicitlyrecordschangesintaxpaymentsthatresultfromaninvestmentprojectinanexhaustivefinancialplan.TheVoFItablepresentedinSection4.3isextendedbytwocolumnsforadditionalorreducedtax-dependentcashoutflows,i.e.bytaxpaymentsandtaxrefunds.Adjustedinterestratesforloansorforshort-terminvestmentsarenotrequired.Instead,taxesareincludedwhendeterminingthecompoundvalueTheVoFImethod,withitsseparatecalculations,allowsaninvestmentappraisaltoincorporateaspecifictaxsystem’sknowncharacteristics

5.1IncomeTaxesandInvestmentDecisions

5.1.1TaxesandtheVisualisationofFinancialImplications(VoFI)MethodExample5-2Example4-3isextendedheretoconsidertaxeffects.ThedeterminationofcompoundvaluesforinvestmentprojectsAandBrequiresseparatecalculationsfortheirrelevanttaxcashpayments,whichthencanbeincorporatedintotheVoFItable.

Again,asinExample5-1,ataxrateof40%isassumed.

5.1IncomeTaxesandInvestmentDecisions

5.1.1TaxesandtheVisualisationofFinancialImplications(VoFI)MethodExample5-2Fig.5-1:VoFIplanforinvestmentprojectAconsideringtaxes

5.1IncomeTaxesandInvestmentDecisions

5.1.1TaxesandtheVisualisationofFinancialImplications(VoFI)MethodExample5-2ThefollowingtableshowstheseparatecalculationsnecessarytodeterminethetaxpaymentsresultingfromprojectA.

Fig.5-2:SeparatecalculationstodeterminethetaxeffectsofinvestmentprojectA

5.1IncomeTaxesandInvestmentDecisions

5.1.1TaxesandtheVisualisationofFinancialImplications(VoFI)MethodExample5-2Takingtaxesintoaccount,thecompoundvalueofinvestmentprojectAis45,514.12(asshowninFigure5-1).Theopportunityincomevalueiscalculatedusinganafter-taxinterestrate(ct),whichisderivedfromtheassumedtaxationrateof40%:

Usingthisfigure,thecompoundvalueofthealternativeincomeopportunityamountsto24,567.93(=20.000·(1.042)∧5)ProjectAremainsabsolutelyprofitable,therefore.ForinvestmentprojectB,acompoundvalueof42,676.33isobtainedwhentaxesareincluded(asatpointintimet=4).Becausethisishigherthanthecompoundvalueofthealternativeincomeopportunity(23,577.67),thisprojectisalsoabsolutelyprofitable.

5.1IncomeTaxesandInvestmentDecisions

5.1.1TaxesandtheVisualisationofFinancialImplications(VoFI)MethodExample5-2Inordertoassessrelativeprofitability,thecompound

valueforprojectBasatt=5maybeused.Assumingtheafter-taxinterestratedeterminedabovetoberelevant,thiscompoundvalueis:

ThereforeinvestmentprojectAremainsrelativelyprofitable

5.1IncomeTaxesandInvestmentDecisions

5.1.1TaxesandtheVisualisationofFinancialImplications(VoFI)MethodAssessmentofthemethod

Inassessingthisappraisalmethodincludingtaxeffects,ourpreviousevaluationoftheunderlyingVoFImethodremainsvalid.Thecompoundvaluecalculations,andthesuccessiveinclusionofcashflowsandtaxpayments,givetheVoFImethodanadvantageovertheNPVmethodinconsideringtaxpaymentsresultingfromaninvestment.TheVoFImethodmaybetterreflectthevarietyoftaxregulationsthatexistinrealityandismoretransparent.Althoughtheexamplepresentedassumesahighlysimplifiedsetofcircumstances(seetheassessmentinSection5.1.1),themethodcanbeappliedquitereadilytoothersituationsaswell

5.2TheAssessmentofForeignDirect

Investments5.2.1SpecialCharacteristicsofForeignDirectInvestmentsAforeigndirectinvestment(FDI)includestheestablishment,expansionoracquisitionofsalesoutlets,storageorproductionplantsabroad,andthedirectinfluencingofthedecisionsmadebyaforeigncompanyunit.Theinvesting‘home’companysustainscashoutflowsinitsdomesticcurrency(i.e.the‘homecurrency’)tofinanceassetsinthe‘investmentcountry’,sothatfuturecashflowsurplusesmaybeachievedinthecurrencyofthatcountry(i.e.the‘investmentcurrency’).Additionally,foreigndirectinvestmentshavespecialcharacteristicsthatmakeitusefultopresentaseparatediscussionofmodelsandmethodsfortheirappraisal.

5.2TheAssessmentofForeignDirect

Investments5.2.1SpecialCharacteristicsofForeignDirectInvestments(i)Forforeigndirectinvestments,atleasttwocompanyunitsareinvolved:theunitthatviewstheinvestmentasanFDI(the‘mothercompany’);andtheexistingornewly-formedunitabroad(the‘daughtercompany’).Inthefollowingdiscussion,theperspectiveofthemothercompanyisadopted,sincethisunitusuallysuppliesmostofthenecessaryinvestmentfunds,itstargetsaredominatingandthis

approachthereforeallowsincorporatingmostofthedecision-relevantfactors.

Thenecessaryanalysisandforecastingactivitiescanbesummarisedinsequentialsteps:

5.2TheAssessmentofForeignDirect

Investments5.2.1SpecialCharacteristicsofForeignDirectInvestments1.Identifythecashflowchangesatthedaughtercompanyintheinvestmentcurrency.2.Identifythecashflowexchangesbetweendaughterandmothercompanyfromthepointofviewofthemothercompanyandinthehomecurrency.3.Identifyothercashflowchangeswithinthemothercompany,inthehomecurrency.

5.2TheAssessmentofForeignDirect

Investments5.2.1SpecialCharacteristicsofForeignDirectInvestments(ii)TheeffectsofanFDIareofteninfluencedbydifferingtaxsystemsinthehomeandinvestmentcountries.

(iii)InflationratesareanotherimportantinfluenceontheprofitabilityofanFDIproject.

(iv)ThecashflowsassociatedwithanFDIwillaccrueindifferentcurrencies.

Exchangeratechangesareoftendrivenbydifferingpricetrendsintwocountries.

Forafloatingexchangeratesystem,thepurchasingpowerparitytheoryhasbeenformulatedtoexplainthelinkbetweeninflationratesandexchangerates

5.2TheAssessmentofForeignDirect

Investments5.2.1SpecialCharacteristicsofForeignDirectInvestments(v)Foreigndirectinvestmentspotentiallyallowaccesstoseveralnationalcapitalmarketsand,thus,toaninternationalcapitalmarketformedwithdifferentcurrenciesanddifferentinflationandinterestrates.Iftheexchangeratechangesandinterestratesareconstantovertime,thenthefollowingisvalid:

5.2TheAssessmentofForeignDirect

Investments5.2.1SpecialCharacteristicsofForeignDirectInvestments(vi)AnFDIofteninvolvesgreateruncertaintythanahomeinvestment.

Thecharacteristicfeaturesofforeigninvestmentscanbeconsideredusingdifferentmodelsforinvestmentappraisal.Inthefollowingdiscussion,theNPVandVoFImodelsareemployed.

5.2TheAssessmentofForeignDirect

Investments5.2.2NetPresentValueModelandtheAssessmentofForeignDirectInvestmentsTaxes(asdiscussedbefore),inflationanduncertainty(takenuplater–seeChapter8)arenotconsideredinthefollowingmodelanalyses.

Inaperfectinternationalcapitalmarket,theInternationalFISHERConditionstipulatesthatinterestratesindifferentnationalcapitalmarketsareequivalentafteraccountingforexchangeratechanges.Withaconstantuniformdiscountrateinthehomecountry(ih),

theNPVfromthepointofviewofthemothercompanyandinthehomecurrency(NPVmh)maybedeterminedfromthenetcashflowsintheforeigncurrency(NCFft)andtherelevantexchangerate(ert)toconverttothehomecurrency:

5.2TheAssessmentofForeignDirect

Investments5.2.2NetPresentValueModelandtheAssessmentofForeignDirectInvestmentsAssumingaconstantexchangeratechange('er)andusingthefollowingrelationship:

OnaccountoftheInternationalFISHERCondition,therelationshipbetweentheuniformdiscountrateinthehomecountryandtheinterestrateintheinvestmentcountry(if)isassumedtobeconstantandcanbeexpressedasfollows:

5.2TheAssessmentofForeignDirect

Investments5.2.2NetPresentValueModelandtheAssessmentofForeignDirectInvestmentsTheNPVtothemothercompanycanthereforebedeterminedusingtherelevantuniformdiscountratesineitherthehomeortheforeigncurrency.Theaboveconsiderationassumes–asasimplification–thattheexchangeratechangesareconstantovertime.However,theargumentcanbealsotransferredtothecasesofperiod-specificexchangeratechangesandvaryinghomeandforeignuniformdiscountrates.

5.2TheAssessmentofForeignDirect

Investments5.2.2NetPresentValueModelandtheAssessmento