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How should a firm adjust the capital budgeting analysis for investment in a country where the...

How should a firm adjust the capital budgeting analysis for investment in a country where the currency is extremely volatile?

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Answer #1

A firm should use risk weighted capital budgeting analysis, when investment into another currency where the currency is extremely volatile, because there would be an adjustment regarding current rate risks and there would be a higher rate of discounting because of that currency risk.

Capital budgeting decisions should be e done on the basis of adjustment of risks which is incorporated with the volatility of investment into foreign country. Since the market risk cannot be easily predicted, there must be a conservative approach while valuation of different projects and higher rate of discounting should be allocated to them in order to arrive at investment decisions regarding capital budgeting.

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