Evaluating International Projects: An Adjusted Present Value Approach

Abstract

In evaluating projects that cut across national boundaries, firms must deal with a variety of issues seldom encountered within a single country that affect the distribution of net operating cash flows available to the parent, as well as the valuation of these cash flows.1 Factors influencing the statistical distribution of net operating cash flows, in addition to differences in fundamental economic and political conditions in various countries, include differing rates of inflation and volatile exchange rates that may or may not cancel each other, differences in tax rules and tax rates, and restrictions or taxes on cross-border financial transactions. Factors that may influence the valuation of operating cash flows with a given statistical distribution include incomplete and often segmented capital markets that result from controls on financial transactions both within and among countries; the dependence of net of tax cash flows available to the parent on the firm’s overall tax and cash-flow position in various countries; the availability of project-specific concessional finance—loans, guarantees, or insurance against commercial or political risks; and, on occasion, requirements to issue securities—especially equity—within markets partially or totally isolated by barriers to internal or cross-border financial transactions. Further, the available cash flows and their value to the firm often depend on the specific financing of the project, not only because of concessional financing opportunities, but also because the costs or limits on cross-border transfers often depend on the nature of the financial transaction involved, e.g., interest or principal, fees, dividends, or payment for goods.