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1、CHAPTER18INTERNATIONALCAPITALBUDGETINGSUGGESTEDANSWERSANDSOLUTIONSTOEND-OF-CHAPTERQUESTIONSANDPROBLEMSQUESTIONS1.Whyiscapitalbudgetinganalysissoimportanttothefirm?Answer:Thefundamentalgoalofthefinancialmanageristomaximizeshareholderwealth.Capitalinvestmentswith
2、positiveNPVorAPVcontributetoshareholderwealth.Additionally,capitalinvestmentsgenerallyrepresentlargeexpendituresrelativetothevalueoftheentirefirm.Theseinvestmentsdeterminehowefficientlyandexpensivelythefirmwillproduceitsproduct.Consequently,capitalexpendituresd
3、eterminethelong-runcompetitivepositionofthefirmintheproductmarketplace.2.WhatistheintuitionbehindtheNPVcapitalbudgetingframework?Answer:TheNPVframeworkisadiscountedcashflowtechnique.Themethodologycomparesthepresentvalueofallcashinflowsassociatedwiththeproposedp
4、rojectversusthepresentvalueofallprojectoutflows.Ifinflowsareenoughtocoveralloperatingcostsandfinancingcosts,theprojectaddswealthtoshareholders.3.Discusswhatismeantbytheincrementalcashflowsofacapitalproject.Answer:Incrementalcashflowsaredenotedbythechangeintotal
5、firmcashinflowsandcashoutflowsthatcanbetraceddirectlytotheprojectunderanalysis.4.Discussthenatureoftheequationsequence,Equation18.2ato18.2f.Answer:Theequationsequenceisapresentationofincrementalannualcashflowsassociatedwithacapitalexpenditure.Equation18.2aprese
6、ntsthemostdetailedexpressionforcalculatingthesecashflows;itiscomposedofthreeterms.Equation18.2bshowsthatthesethreetermsare:i)incrementalnetprofitassociatedwiththeproject;ii)incrementaldepreciationallowance;and,iii)incrementalafter-taxinterestexpenseassociatedwi
7、ththeborrowingcapacitycreatedbytheproject.Note,theincremental“netprofit”isnotaccountingprofitbutrathernetcashactuallyavailableforshareholders.Equation18.2cIM-16cancelsouttheafter-taxinteresttermin18.2a,yieldingasimplerformula.Equation18.2dshowsthatthefirsttermi
8、n18.2cisgenerallycalledafter-taxnetoperatingincome.Equation18.2eyieldsyetacomputationallysimplerformulabycombiningthedepreciationtermsof18.2c.Equation18.2fshowsthatthefirstt
