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
Domestic Budgeting
- Cash Flows: Estimated in Home Currency.
- Inflation: Single inflation rate applies.
- Tax: Single tax law.
- Risk: Only Business Risk.
- Perspective: Project and Parent are same.
VS
International Budgeting
- Cash Flows: Estimated in Foreign Currency, then converted.
- Inflation: Differential inflation affects exchange rate.
- Tax: Double taxation issues.
- Risk: Business + Forex + Political Risk.
- Perspective: Parent vs Subsidiary perspective differs.
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:
- Table: Use the Comparison table above.
- Highlight: Explain the "Blocked Funds" issue which only exists in International budgeting.
- 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! 🎯
Test Your Knowledge
Question 1 of 5
1. Which perspective is the deciding factor in MNC Capital Budgeting?