Question Details

Explain how Nike can conduct multinational capital budgeting 



1. Decisions Based on Capital Budgeting. Marathon Inc. considers a one-year project with the
Belgian government. Its euro revenue would be guaranteed. Its consultant states that the
percentage change in the euro is represented by a normal distribution, and that based on a 95
percent confidence interval, the percentage change in the euro is expected to be between 0 percent
and 6 percent. Marathon uses this information to create three scenarios: 0%, 3%, and 6% for the
euro. It derives an estimated NPV based on each scenario, and then determines the mean NPV.
The NPV was positive for the 3% and 6% scenarios, but was slightly negative for the 0 percent
scenario. This led Marathon to reject the project. Its manager stated that it did not want to pursue a
project that had a one-in-three chance of having a negative NPV. Do you agree with the manager-
interpretation of the analysis? Explain.
2. Estimating Cash Flows of a Foreign Project. Assume that Nike decides to build a shoe factory
in Brazil, half the initial outlay will be funded by the parent- equity and half by borrowing funds
in Brazil. Assume that Nike wants to assess the project from its own perspective to determine
whether the project- future cash flows will provide a sufficient return to the parent to warrant the
initial investment. Why will the estimated cash flows be different from the estimated cash flows of
Nike- shoe factory in New Hampshire? Why will the initial outlay be different? Explain how Nike can conduct multinational capital budgeting in a manner that will achieve its objective.




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