Question

1. What is the reason that companies should use different capital budgeting techniques, namely discount rate calculation models, for domestic and international projects? Give examples from the AES case.

Answer 1

Reasons company should use different discounting models and different capital budgeting techniques because

1. They work in different environments & different countries and obtain credit from different countries.

2. Risk exposures are different in different environment & countries .

3. Different rate of discount should be taken for calculations as there are foreign exchanges risks exposures.

AES earlier used to discount all projects whether domestic or foreign, with same interest rate and it was adopting same capital budgeting technique for all projects . That was a bad criteria of capital budgeting decision.