Domestic vs International Capital Budgeting – Key Differences

"Should we build a factory in Vietnam?" This is a Capital Budgeting decision. It is 10x harder than building a factory in Gujarat.

1. Key Differences

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2. Parent vs Subsidiary Perspective

This is the most critical concept.

• Subsidiary Perspective: "The project is profitable for me in Vietnam."
• Parent Perspective: "Is the project profitable for me in India?"
• Conflict: A project might generate huge profits in Vietnam (Subsidiary View), but if the Vietnamese government blocks repatriation, the Parent gets ZERO (Parent View).
• Deciding Factor: Parent Perspective is always final.

3. Exam Notes: Writing the Answer

Question: "Distinguish between Domestic and International Capital Budgeting." (10 Marks)

Answering Strategy:

1. Table: Use the Comparison table above.
2. Highlight: Explain the "Blocked Funds" issue which only exists in International budgeting.
3. Conclusion: "International Budgeting requires a higher discount rate to account for higher risk."

Summary

• Complexity: Multiple currencies and tax regimes make Excel modeling complex.
• Risk Premium: We usually add a broader risk premium (e.g., +2%) to the Discount Rate for foreign projects.

Quiz Time! 🎯

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