Question

Investments in Global Markets" Please respond to the following: Use the Internet and/or Strayer Learning Resource Center to research capital investments in global markets. Next, analyze the main factors that an organization should consider in determining the required rate of return for evaluating projects in global markets and the impact that this will have on decision making. Imagine that you are the Chief Financial Officer (CFO) of a U.S.-based international manufacturing company. Propose two (2) actions that you would take in order to defend the difference in the required rate of return for your company on similar projects in an established market as compared to the same investment in an emerging market. Provide a rationale for your response.

Answer 1

Capital Investment in International Markets

With globalization in full swing, the world is more interconnected now than ever. This secular shift requires investors to reassess the allocation of their capital. Exposure to global markets is increasingly important for any portfolio strategy, be it conservative or risky. Investments outside of the U.S. are no longer a novelty or specialty; they are a necessary component to any successful diversification.

Global investments come in all shapes and sizes, with some performing better than others. Today's investor has a plethora of funds to choose from to gain exposure to global markets. These funds, which are typically classified in "international" categories, can range in focus, strategy and even investment vehicles. To assess these options, investors should look to a fund's track record and the tenure of the management team. While previous performance is not always indicative of future performance, a historical track record combined with market experience is a critical combination. The ability to demonstrate performance in all types of markets is key.

Factors that an organization should consider in determining the required rate of return for evaluating projects in global markets and the impact that this will have on decision making

1. Project Risk

Some of the risk you face from a long-term investment is from the project itself. Project risk approximates the chance that the project will not be as profitable as expected due to errors from the company or from the project's initial evaluation. Project risk is increased when a company invests in a business that is not in its area of expertise. This increases the chance that management will not be able to properly value the project's cash flows and that the company will make errors while running the business

2. Market Risk

Market risk measures the part of a project's risk from macroeconomic factors such as inflation and interest rates. Market risk is increased during a weak economy. A poor economy can decrease demand for a product, potentially turning a project unprofitable. Banks may be more reluctant to lend in a weak economy, raising the cost of capital for the project. High inflation can also be a problem at it weakens the long-term real return of the project. These factors increase the market risk of a project and contribute higher total risk.

3. International Risk

If a company's capital budget project will involve another country, it will be exposed to international risk. This entails political and exchange-rate risk of the project. If a project is based in a country with an unstable political structure, civil or political unrest could cause the entire investment to be lost. If currency rates move in an unfavorable direction, the company could face higher relative costs and lower relative gains. Domestic projects are completely devoid of this type of risk

Actions that you would take in order to defend the difference in the required rate of return for your company on similar projects in an established market as compared to the same investment in an emerging market.

Markets in developed nations present an array of challenges to investors. These challenges are compounded when investing in emerging markets, in part becauseacquiring information about emerging markets is difficult. The differences betweendeveloped and emerging markets range from the sequence and method of trade to thecompany requirements for reporting market exchanges

As a CFO of the U.S.-based international manufacturing company, the first action I will take is considering the risk factors between the emerging markets and established market. A risk analysis is needed. A higher-risk project would be evaluated using a higher discount rate. Another action I will take is conducting post-Audit, which is a thorough evaluation of how well a project’s actual performance matches the original projections.

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