Question

Discuss how uncertain salvage value and blockage of fund can affect Multinational Capital
Budgeting decision.

Answer 1

Uncertain salvage value

The salvage value is necessary to reach to the project’s NPV. To take capital budgeting decision, the MNCs compute the break even salvage value.

In the case of MNCs, the salvage value is uncertain. In such cases, incorporating various possible outcomes for the salvage value is done. Then the MNC will re-estimate the NPV on each possible outcome. Thus a capital budgeting decision is taken. So an uncertain salvage value is relevant for MNC in capital budgeting decision.

Blockage of fund

Another factor to be considered in capital budgeting decision of MNCs is the blockage of funds. MNCs business is spread over different countries. The host country may require the earnings of the company to be reinvested in the local country itself than invested into the parent company. Thus the host country blocks funds locally. This impacts the capital budgeting decision.