31/10/2009
An Overview of Multinational Capital Budgeting Process
International Internati onal Trade & Finance (F-208)
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Contents
Page number
1. Introduction
7
2. An Overview of Multinational Capital Budgeting
12
3. Company Profile : Grameenphone ltd.
18
4.
Multinational Capital Budgeting : a case study of Grameenphone
23
5. Grameenphone in Bangladesh: some key points
31
6. Summary and conclusion
33
7. Bibliography
35
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Introduction ORIGIN The preparation of this report is a requirement of the course on INTERNATIONAL TRADE AND FINANCE . professor of Finance of
Dhaka,
FINANCE ,
D epartment
D r.
H. M. Mosarof Hossain, Associate
at Faculty of Business Studies, University
who is also the course teacher of INTERNATIONAL TRADE AND
has assigned us to choose a topic regarding insurance sector and
work on it . The topic of our report is CAPITAL BUDGETING PROCESS by an MULTINATIONAL CORPORATION .
This report has been assigned to the students
of BBA 14th batch.
OBJECTIVE OF THE TERM PAPER The primary objective of this study is the partial fulfillment of the course requirement . The objectives of this report are as follows: To fulfill the partial requirement of the course INTERNATIONAL TRADE AND FINANCE offered in BBA program.
ind out the implementation o f The collateral purpose of this report is to f ind capital budgeting process by an MNC To build a bridge between the theoretical & practical education
The main objective of the report is to show process of multinational capital budgeting
.
It will also enable us to improve our skills on report writing . As corporate executive put great value on report writing as an 4
important element in organization success, this part of the course will prepare us to face the future challenges of corporate world. It helps us to be familiar with the recent practices and techniques in multinational capital budgeting and it is also a vital matter for the business students as they are prepare themselves for corporate world. To meet the curiosity in this stated subject .
ORGANIZATION OF THE REPORT The report consists of four parts . The parts that consist these reports are following: A brief view of multinational capital budgeting:This budgeting: This part shows the definition, techniques, pictorial presentation of multinational capital budgeting process. Company profile : Grameenphone ltd: A brief narration of the organization we selected for a better perception of our report . Multinational Multination al Capital Budgeting Process: It will give a illustrated picture of multinational capital budgeting process . Summary and conclusion:
it will presents the gist of our report .
SCOPE
Our honorable teacher assigned us to choose a multinational organization and demonstrate their capital budgeting process . As per requirement we choose the Grameenphone ltd. the leading mobile phone operator in Bangladesh and demonstrate the capital budgeting process used by them .
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We
only clarify the subject matters which is relevant to our report
topics chosen by our group.
METHODOLOGY & SOURCES OF DATA
The information for the report was collected from both primary and secondary sources. Primary sources: We worked on Grameen phone ltd and coleect data from their employees . Secondary sources: Secondary data have been collected from various sources like official portals, search engines, annual reports, books and journal. Our text book International Financial management , by
Jeff Madura also helped us in this regard . The data and information collected from secondary sources have been analyzed and presented keeping relevancies with the subject matter of the report .
LIMITATION The major limitations encountered are: Lack of enough time : The term paper was prepared within a very short
time considering the topics related to it. Thats why; it was not possible to demonstrate all aspects o f the report. or suff icient icient analysis f or or preparing Insufficient data : The data required f or the report could not be collected due to the t he insuff iciency iciency of data. 6
Inconsistent data: data f rom rom diff erent erent sources were quite inconsistent
which created some problems in making the report & compelled us to verif y the data diligently. Unwillingness of the organizations employees to reveal data and lack of co cooperativeness with us. Lack of experience about multinational capital budgeting process also
acted as constraints in the way o f exploration on the topic.
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Capital budgeting capital budgeting is the planning process used to determine whether a f irm's irm's long term investments such as new machinery, replacement machinery, new plants, new products, and research development projects are worth pursuing. It is budget f or or major capital, or investment, expenditures. Many f ormal ormal methods are used in capital budgeting, bud geting, including including the techniques such as y y y y y y
Accounting rate of return
Net present value itability index Prof itability Internal rate of return Modif ied ied internal rate of return Equivalent annuity
These methods use the incremental cash f lows lows f rom rom each potential investment, or project Techniques bas ed on accounting earnings earnin gs and accounting rules are sometimes used - though economists consider this to be improper - such as the accounting rate of return, and "return on investment." investment." Simplif ied ied and hybrid methods are used as well, such as payback period and discounted payback period .
Multinational capital budgeting Multinational corporations (MNCs) evaluate international projects by using multinational capital budgeting, which compares the benef its its and costs of these projects. Multinational capital b budgeting udgeting involves determining the projects net present value by estimating the present value of the projects uture cash f lows lows and subtracting the initial outlay required f or or the projects. Some special f uture circumstances of international projects that aff ect ect the f uture uture cash f low low or the discount rate used to discount cash f low low make multinational capital budgeting more complex.
Why Multinational capital budgeting
y
Many international projects are irreversible and cannot be easily sold to other corporations at a reasonable price
y
Proper use of multinational capital budgeting can identif y the international projects worthy
of implementation. y
It aff ects ects the prof itability itability of a f irm. irm.
y
It eff ect ect over a long time spans and inevitably inevitably aff ects ects the companys f uture uture cost structure.
y
y
Capital investment decision once made, are not easily reversible without much f inancial inancial loss of f irm f f irm It involves cost and the majority of the f irms irms have scarce capital sources. s ources.
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Subsidiary versus Parent Perspective
Multinational capital budgeting can be conducted from two perspective: y
Parents perspective
y
Subsidiary perspective
The f easibility easibility of the capital budgeting analysis can vary with the perspective because the net af tertertax cash inf lows lows to the subsidiary can di ff er er substantially f rom rom those to the parent. Such diff erences erences can be due to several f actors, actors, some of which are pointed here: y
Tax diff erentials erentials
y
Restricted remittances
y
Excessive remittances
y
Exchange rate movements
A graphical representation of multinational capital budgeting
cashf lows lows generated by subsidiary Corporate taxes paid to host af ter ter tax cashf lows lows to subsidiary Retained earnings by subsidiary
cash f lows lows remitted by subsidiary Withholding tax paid to host af terter- tax cash cashf lows lows remitted by subsidiary
conversion of unds to parents f unds currency
Parent
PV of
parent cash f low low
initial investment by parent
cumulative N PV
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The parent perspective is appropriate in attempting attempting to determine whether a project will enhance the f irms irms value. Any project that create a positive net present value f or or the parent should enhance shareholder wealth. One exception to the rule of using a parents perspective occurs when the f oreign oreign subsidiary is not wholly owned by the parent and the f oreign oreign project is partially f inanced inanced with retained earnings of the parent and of the f oreign oreign subsidiary. In this case the goal is to make decisions in the interests o f both groups of shareholders and not to transf er er wealth f rom rom one entity to another. throughout our report we f ocused ocused deeply de eply on parents parents perspective. persp ective.
Input for multinational capital budgeting 1. Initial investment:
Funds initially invested in a project may include not only whatever is necessary to start the project but also additional f unds, unds, such as working capital to support the projectover time. Because cash inf lows lows will not always be su ff icient icient to cover upcoming cash out f lows, lows, working capital is needed throughout the projects lif e time. 2. Price and consumer demand: demand:
The estimated price and demand schedules during each of the year. 3. Costs:
The variable costs(f or or material, labor,etc per unit have been estimated and consolidated. 4. Tax laws:
Bangladesh government imposes a 20% tax rate on income, in addition it will impose a 10% withholding tax on any f unds unds remitted by the subsidiary. 5. Remitted funds:
The subsidiary company sends back all the net cashf lows lows to the parent at the end of the year. 6. Exchange rates:
The spot exchange rate of us dollar is 69.15 . subsidiary uses this exchange rate as its best orecast of that will be exist in f uture. uture. f orecast
7. Salvage (liquidation (liquida tion value): value): Government
will pay some amount of dollar f or or the sale of subsidiary to the parent.
8. Required rate o f return:
Subsidiary requires a 17% return on this project.
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Factors to consider in multinational capital budgeting
y
Exchange rate fluctuation
The exchange rate typically change over time.
y
Inflation
In this country inf lation lation is increasing over time. It si considered in multinational capital budgeting.
y
Financing arrangement
Many f oreign oreign projects are partially f inanced inanced by f oreign oreign subsidiaries. This f oreign oreign f inancing inancing inf luences luences the f easibility easibility of a project.
y
Blocked funds
The host country may block f und und that the subsidiary subsid iary attempts attempts to send to the parent.
y
Uncertain salvage value
When the salvage value is uncertain, the MNC may incorporate various possible outcomes f or or the salvage value and estimate the NP based on each possible outcome.
y
Impact of project on prevailing cash flow
The new project has no impact on prevailing cash f lows. lows.
y
ost H ost
government incentives
Foreign project proposed by MNCs may have a f avorable avorable impact on economic conditions in the host country and are theref ore ore encouraged encouraged by the host government. y
Real option
ied real asset such as machinery or a f acility. acility. Some capital A real option is an option on specif ied budgeting projects contain real options in that they may allow opportunities to obtain or eliminate real assets.
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Adjusting Project Assessment for Risk If an MNC is unsure of the estimated cash f lows lows of a proposed project, it needs ne eds to in-corporate in-corporate an adjustment f or or this risk. Three methods are commonly used to adjust the evaluation f or or risk: y
Risk-adjusted discount rate
y
Sensitivity analysis
y
Simulation
Each method is described in turn.
Risk-Adjusted Discount Rate: Ra te:
The greater the uncertainty about a projects f orecasted orecasted cash f lows, lows, the larger should be the discount rate applied to cash f lows, lows, other thing beings equal. This risk-adjusted discount rate tends to reduce the worth of a project by a degree that ref lects lects the risk the project exhibits. Sensitivity Analysis:
Once the MNC has estimated the NP of a proposed prop osed project, p roject, it may want to consider alternative estimates f or or its input variables. Sensitivity analysis can be more use f ul ul than simple point estimates because it reassesses the project based on various circumstances that may occur. Simulation:
Simulation can be used f or or a variety o f tasks,including the generation of a probability distribution f or or NP based on a range of possible values f or or one or more input inpu t variables variabl es. Probability distributions can be developed f or or all variables with uncertain uncertain f uture uture values. The f inal inal result is a distribution of possible NP s that might occur f or or the project. The simulation ation provides a distribution of the possible outcomes that may occur.
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Company Profile : Grmeenphone ltd.
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Grameenphone Limited
Type
Limited
Founded
1997 Celebration Point, Road # 113 A,
Headquarters
Plot 3 & 5, Gulshan, Dhaka, Bangladesh Key people
Oddvar Hesjedal, CEO
Industry
Mobile Telecommunication Telecommunication
Products
Telephony, EDGE, GSM
Revenue
891Million 891Million USD U SD
Net income
Employees
5052
Website
www.grameenphone.com
6,403.8 Million Taka
Grameenphone (Bengali: ç ), ), widely known as GP, is the leading telecommunications
service provider in Bangladesh. With more than 20 million subscribers (as o f June 2008), Grameenphone is the largest cellular operator in the country. It is a joint venture enterprise between Telenor and Grameen Telecom Corporation Corp oration,, a non-prof it it sister concern o f the internationally acclaimed microf inance inance organization and community development bank l argest telecommunications telecommunica tions company in i n Norway, owns 62% 62 % Grameen Bank. Telenor, the largest shares o f grameenphone and Grameen Telecom owns the remaining 38%. Grameenphone
was the f irst irst company com pany to introdu int roduce ce GSM technology in Bangladesh). It also established the f irst irst 24-hour Call Center to support its subscribers. With the slogan Stay Close, stated goal o f Grameenphone is to provide a ff ordable ordable telephony to the entire population of Bangladesh.
History The idea o f providing wider mobile phone access to rural areas was originally conceived by Iqbal Quadir, who is currently the f ounder ounder and director of the Legatum Center f or or Development and Entrepreneurship ntrepreneurship at MIT. MIT. He was inspired by the Grameen Bank microcredit model and envisioned a business model where a cell phone can serve as a source o f income. Af ter ter leaving his job as an investment banker banker in the United States, Quadir traveled back to Bangladesh, af ter ter meeting and successf ully ully raising money f rom rom New York based investor and philanthropist Joshua Mailman, and worked f or or three years gaining 15
support f rom rom various organizations including Nobel Peace Prize laureate Muhammad Yunus of Grameen Bank and the Norwegian telephone company,Telenor. company,Telenor. He was f inally inally successf ul ul in f orming orming a consortium with Telenor and Grameen Bank to establish Grameenphone. Quadir remained a shareholder o f Grameenphone rameenphone until 2004. Grameenphone
received a license f or or cellular phone operation in Bangladesh f rom rom the Ministry of Posts and Telecommunications on November 28, 28, 1996. Grameenphone started operations on March 26, 1997, 199 7, the Independence Independen ce Day in Bangladesh. Grameenphone
originally off ered ered a mobile-to-mobile connectivity (widely known as GP-GP connection), which created a lot o f enthusiasm among the users. It became the f irst irst operator to reach the million subscriber milestone as well as ten million subscriber milestone in Bangladesh.
Network According to
Grameenphone,
it has so f ar ar invested more than BDT 10,700 crore (USD 1.6 billion) to build the network in f rastructure rastructure since 1997. It has invested over BDT 3,100 crore (USD 450 million) during the f irst irst three quarters o f 2007 while BDT 2,100 crore (USD 310 million) was invested in 2006 alone.
Grameenphone
has built the largest cellular network in the country with over 10,000 base stations in more than 5700 locations. Presently, nearly 98 percent o f the country's population is within the coverage area o f the Grameenphone network.
The entire Grameenphone network is also EDGE/GPRS enabled, allowing access to highspeed Internet and data services f rom rom anywhere within the coverage area. There are currently nearly 3 million EDGE/GPRS users in the Grameenphone network.
Pr oducts off ered ered Mobile Telephony Grameenphone
was the f irst irst operator operator to introduce the pre-paid pre-paid mobile phone service in Bangladesh in September 1999. It o ff ers ers the pre-paid subscription subscri ption under und er the name name Easy
Prepaid which is currently calld "smile prepaid". Besides smile, Grameenphone also offers djuice' . a youth based mobile to mobile connectivity within Bangladesh named djuice' Grameenphone
also o ff ers ers postpaid mobile service. xplore P ostpaid is the name o f its post
paid service.
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Value Added Services Grameenphone
also o ff er er non-voice -voi ce services, service s, which re f er er to as value-added services, or VAS, to its subscribers. Its subscribers are increasingly using these non-voice services, in particular Internet access, downloadable do wnloadable content and ring-back tone to ne services, each described in urther detailbelow. f urther SMS: SMS: Allows subscribers to send short text messages to other mobile users handset display screens; iceSMS: Allows subscribers to send audio messages (instead o f text) to other GP VoiceSMS: subscribers. Web to SMS: SMS: A web-based SMS service that allows our subscribers to send SMSs to single or multiple recipients. ail: Enables subscribers to retrieve audio message recordings le f t by callers. Voicemail: MMS: MMS: Allows subscribers to send pictures, text and sound /voice in a single packet message. GPRS: Allows subscribers to use their mobile phones to access the Internet, send EDGE/GPRS: and receive MMS, browse WAP and download iles; f iles; GP World: rom WAP enabled phone sets to rld: Allows subscribers to visit wap.gpworld.com f rom download Tones and True Tones o f hit songs; Poly services: Allows subscribers to use BlackBerryTM wireless services with BlackBerryTM services: support e-mail, phone, Internet, instant messaging, organizer and more; Bull-St ock Information: Allows subscribers to receive, almost in real-time, updates on stock prices on their mobiles. Messenger: Allows subscribers to use P C-style instant messaging through our own Instant Messenger: chat sof tware. tware. Multimedia Content Services: inance and Services: Allows content such as music, sports, news and f inance other content to be accessible or pushed to subscribers mobile handsets, including instant news updates and headlines headli nes (including New Ne ws Update, Tra ff ic ic Update and Cricket Alert); Grameenphone HealthLine: erence with a licensed physician that HealthLine: An interactive teleconf erence provides medical advice and assistance assistan ce to our subscribers s ubscribers and non n on-subscribers (who register r egister or a f ee) ee) f or or both emergency and non-emergency situations, 24 hours a day, seven days a f or week. Health Line was awarded the GSMA Award f or or Best Use o f Mobile f or or Social and Economic Development at the 3 GSM World Congress in February 2007; Chat: A WAP -based instant messaging service that allows subscribers to engage in Mobile Chat: online and mobile chat; Web: Allows subscribers with compatible mobile handsets to access the Internet; Mobile Web: Pay for Me: Me: Allows prepaid subscribers to call another subscriber even i f the caller does not have su ff icient icient balance in his account to make the call. The intended recipient can decide whether or not to take the call. Welcome Tunes: unes: Allows subscribers to set the tunes that callers will hear when they call service: Power Development Board customers in Chittagong and Coxs Bazaar and BillPay service: Titas Gas Transmission and Distribution Company customers in greater Dhaka, Maymensingh, and Comilla can pay their bills either f rom rom their handsets or at any authorized BillPay center whether whet her or not n ot they have a mobile phone. phon e.
Other Services 17
y
y
y
y
Internet : Grameenphone provides internet service in its coverage area. As it has EDGE/GPRS enabled network, any subscriber can easily access to internet through this network. Grameenphone was the f irst irst mobile mobi le operator opera tor in Bangladesh to o ff er er EDGE services to its subscribers. BillPay : A service to enable users to pay their utility bills ( Electricity, Gas etc) through mobile. CellBazaar : A service to enable users sell or buy products through mobile or internet. Various other services like Stock In f ormation, ormation, Instant Messaging, SMS Based Alerts/Services, Voice-based Services, Downloads, Music, Cricket Updates, Web SMS, Mobile Backup etc.
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&+$37(5)285 Multinational
Capital B udgeting : a case st udy of Grameenphone
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Background Grameenphone, widely known as
GP,
is the leading telecommunications service provider in
Bangladesh. It is a joint venture enterprise between Telenor and Grameen Telecom Corporation, a non-prof it it sister concern of the internationally int ernationally acclaimed microf inance inance organization and community development bank Grameen Bank. Telenor, the largest telecommunications company in Norway, owns 62% shares of grameenphone and
Grameen
Telecom owns the remaining 38%.This f oreign oreign
subsidiary subs idiary is not wholly owned own ed by the parent paren t and the f oreign oreign project is partially f inanced inanced with retained earnings of the parent and of the f oreign oreign subsidiary. So, Grameenphone has to balance the interest of both parties and enhance the value of the corporation side by side. 1. Initial investment:
The parent company has invested BDT 35.8 billion in 2008 to develop the network inf rastructure rastructure including working capital. The total amount of investment in Bangladesh in Bangladesh includes f uns uns both f rom rom the parent and subsidiary. We are considering only the f und und f rom rom the parent company telenor. If we imposed a f ixed ixed exchange rate of $1=BDT69.2, the U.S> dollar amount the parents initial investment is $517,715,112. $517,715,112. 2. Revenue:
oran unlimited According to the going concern principle, the company expects to run its business f or uture period. So, to prepare a capital budgeting model f or or the company we consider f ixed ixed revenue f uture earned by the company, f or or the upcoming f uture uture period. The total revenue will be f ixed ixed at BDT 46,684,747,000 3. Costs and expenses expe nses::
The costs are also thought to be f ixed ixed f or or inf inite inite time time period. period. These Costs and expenses include Operating expenses, such as direct cost of network revenue, network operation and maintenance expenses, general g eneral and administrative expenses, selling and distribution expenses and Bad debt expense. The estimated es timated expenses based on present observation obser vation are BDT 12,792,566,000, BDT 2,442,553,000, BDT 5,627,680,000, BDT 6,660,418,000 and BDT 135,290,000 respectively. respectively. 4. Depreciation:
The subsidiary uses the maximum rate of depreciation allowed by Bangladesh government. 5. Taxes:
Bangladesh government will impose 45% tax rate on income. In addition it will impose a 10% withholding tax on any f und und remitted by the subsidiary to parent.
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6. Remitted fund:
The grameeenphone ltd. Plans to send 60% of the all net cash f low low at the end of each year. The Bangladesh government promises no restrictions on the cash f lows lows to be sent back to the parent f irm irm but does impose a 10% withholding tax on any f unds unds sent to the parent, as mentioned earlier. 7. Salvage value:
or a inf inite inite time period, it is estimated to have a As it is a subsidiary going to continue its operation f or uncertain salvage value. 8. Exchange rate:
The spot exchange rate of the Bangladeshi taka is $ 0.0145. grameenphone uses the spot rate as its best f orecast orecast of the exchange rate that will exists in f uture uture periods. Thus the f orecasted orecasted exchange rate f or or all f uture uture periods is $ 0.0145. 9.
Required rate of return:
The Grameenphone requires a 17% return.
Analysis
The capital budgeting analysis will be conducted f rom rom the parents perspective, based on the assumption that the subsidiary is intended to generate cash f lows lows that will ultimately be passed on the to the parent. Thus the net present value (NPV) f rom rom the parents perspe p erspective ctive is based on a comparison of the present value of the cash f lows lows received by the parent to the initial outlay by the parent. Since the Grameenphone s parent perspective is used, the cash f lows lows of concern are the dollars ultimately ultimately received by the parent as a result of the project. The required rate of return is based on the cost of capital used by the parent p arent to make its investment, with an adjustment f or or the risk of the project. For being a prof itable itable subsidiary, the present value of uture cash f lows lows ultimately received by the parent should exceed the parents initial outlay. Here a f uture specimen is given to illustrate the capital budgeting analysis to determine whether the Grameenphone
ltd. will be prof itable itable in near f uture. uture.
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Capital budgeting analysis Grameenpho ne ltd.
Year 0 1.
2 3.
4. 5. 6 7 8 9
10 11 12 13 14 15 16 17 18 19 20 21 22
Revenue Traff ic ic revenue Subscription revenue-postpaid revenue-postpaid Connection revenue Roaming revenue Interconnection revenue - mobile operators Other operating revenue Other income, net Total revenue Operating expenses: Direct cost o f network revenue Network operation and maintenance expenses General and administrative expenses Selling and distribution expenses Bad debt expense Depreciation and amortization amortization Total operating expenses operating prof it it (2)-(5) Finance costs, net Loss on disposal of property, plant and equipment Share of prof it it/(loss) of associate company compan y it bef ore ore tax Prof it Income tax expense it f or or the year (10)-(11) Prof it Net cash f low low to subsidiary (12)+(4) BDT remitted by subsidiary (60%) (13*.60) withholding tax on remitted f und und (14*.10) BDT remitted af ter ter withholding tax (14)-(15) initial investment by parent exchange rate of BDT cash f lows lows to parent lows (17%) PV of parent cash f lows initial investment in USD cumulative NPV
Year 1 BDT 46,684,747,000 448,537,000 384,660,000 386,933,000 4,605,378,000 1,792,891,000 38,156,000 BDT 54341302000 12,792,566,000 2,442,553,000 5,627,680,000 6,660,418,000 135,290,000 10,395,824,000 38,054,331,000 16,286,971,000 -968,503,000 -101,963,000 2,591,000 2,591, 000 15,219,096,000 10,475,013,000 4,744,083,000 15,139,907,000 9083944200 908394420 8175549780
35800000000 0.014461316 118229208.7 695465933.4 517,715,112 177,750,821
Calculation of net present value: Although several capital budgeting techniques are available, a common used technique is to
estimate the cash f lows lows and salvage value to be r eceived by the parent and compute the NPV o f the project
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Where, IO=initial outlay (investment) CFt = cash f low low in period t SVn = salvage value k = required rate of return n = lif etime etime of the project (number of periods)
In this case the net cash f low low is discounted at the required rate of return 17% to derive the present value at perpetuity basis. Finally the cumulative NPV is determined by estimating the present value at a perpetuity basis b asis and subtracting sub tracting the initial investment. NPV
= -517,715,112+695465933.4 -517,715,112+695465933.4 = 177,750,821
Relevant factors to consider in multinational capital budgeting of Grameenphone
The capital budgeting model of Grameenphone ignored a variety of f actors actors that may aff ect ect the capital budgeting analysis, such as
y
Exposure to exchange rate fluctuations:
Grameenphone
realizes that the exchange rate will typically change over time, but it does not know
whether the Bangladeshi taka will strengthen or weaken in the f uture. uture. From the parents point of view, appreciation of the Bangladeshi taka would be f avourable avourable since the Bangladeshi taka inf lows lows would someday be converted to more U.S. dollars. Conversely, depreciation would be unf avourable avourable since the weakened Bangladeshi Ban gladeshi taka would convert to f ewer ewer U.S. dollars over time.
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The table below exhibits both a weak Bangladeshi taka scenario and a strong Bangladeshi taka scenario. Analysis using diff erent erent exchange rate scenarios: Grameenph one ltd.
Year 0 1.
BDT remitted after withholding taxes
2.
Strong BDT scenario: Exchange rate of BDT($1 = BDT 65) Cash f lows lows to parent lows (17% discount rate) PV of cash f lows Initial invest by parent Cumulative NPV
3.
Year 1 8175549780
0.015384615 125777688.9 739868758.4 517,715,112 222,153,646
Weak BDT scenario Exchange rate of BDT($1 = BDT 65) Cash f lows lows to parent lows (17% discount rate) PV of cash f lows Initial invest by parent Cumulative NPV
0.013888889 113549302.5 667937073.5 517,715,112 150,221,961
NPV
Graph: Sensitivity analysis of the projects
50,000,000
NPV to different
00,000,000
exchange rate scenarios
150,000,000
The estimated NPV is NPV
100,000,000
50,000,000
highest if the Bangladeshi taka is expected to strengthen and lowest if it is expected to weaken.
0 $1 = BDT BDT 65
$1 = BDT69.
$1 = BDT 7
24
y
Exposure to inflation:
Bangladesh has a history of f acing acing volatile inf lation lation rate year to year and thus can in f luence luence a projects net cash f lows. lows. The inf lation lation rate of Bangladesh f or or f ollowing ollowing years is given. If we analyze the table we will see the inf lation lation rate has a naegative impact on the companys prof itability itability and thus reduce NPV. Though the reduced year
inf lati lation rate
2009
8.90% 9.10% 7.10% 7% 6% 5.60%
2008 2007 2006 2005 2004
Net prof it it in millon BDT
trend of net prof it it also can be inf lueced lueced by other actors such as compititors, but the strong inf luence luence of f actors inf lation lation rate can hadly be ignored.the joint impact of
3060 7848 6913 6183
inf lation lation and exchange rate f luctuation luctuation on a subsidiarys net cash f lows lows may produce a partial off setting setting eff ect.even ect.even if subsidiary earnings are inf lated, lated, they will be def lated lated when converted into the parents home currency if subsidiarys currency has
weakened.
y
Blocked funds:
oreign subsidiarys to block f unds unds that the Although Bangladesh does not any restriction on f oreign subsidiary attempts to send to the parent,to narrate the impact o f blocked f und und on capital budgeting, we are to assume Bangladesh government has imposed restriction on Grameenphone on remitting cash f lows lows f or or 5 yeasr. Let us assume, Grameenphone invests the f und und in marketable securities which are expected to yield 8% annu ann ually af ter ter taxes. The f ollowing ollowing table shows the impact. capital budgeting with blocked f und und 1 2 3 4 5 6 7
FV of BDT remitted by subsidiary (FVIFA 8%,5years) withholding tax (10%) BDT remitted af ter ter withholding tax exchange rate cash f lows lows to parent USD PV of parent (17%) initial investment in USD cumulative NPV
Year 0
year 5
53295500621 5329550062 47965950559 0.014461316 693650767.3 316304749.9 517,715,112 -201,410,362
so, a blocked f und und f or or 5 year shows a negative NPV.
25
y
ost H ost
government incentives:
The telecom sector is the largest private sector inf rastructure rastructure provider in Bangladesh. Regulatory regime of the country however is still passing through a transition process. The procedural saf eguards eguards of the legal and regulatory regimes are still being developed and, theref ore, ore, existing laws and regulations may not be applied consistently. Instability and uncertainties relating to the regulatory and legal environment could have a material adverse eff ect ect on mobile phone business, inancial conditions and the results of their operations. Unpredictable tax & regulatory regime, f air air f inancial allocation o f f requency are still the key issues to sustain the growth of the industry. f f requency
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&+$37(5),9( Grameenphone in Bangladesh : some ke oints
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Grameenphone in Bangladesh: some key points y
Telecommunication service was quite inadequate, with less than1% than1% teledensity, when GP started in 1997.
y
Undeveloped telecommunications was a major constraint and caused many hindrances in business and the day to day lives o f the people of this coun co untry try, which speeded the growth o f GP.
y
Grameenphone
is the f irst irst mobile phone operator in the country that converted its
status to a public limited company on 25th June 2007 in con f ormity ormity with a new Securities and Exchange Commission regulation requiring such conversion f or or the high capital base companies of the coun co untry try.. y
Recently
Grmeen
phone has o ff ered ered its share through I PO. It will enhance its local
und and reduce parents investment. f und y
In near f uture uture it will have a positive impact on the subsidiarys sub sidiarys net present value.
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&+$37(56,; ARY & CONCLUS ION ION MM SU MM
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Summary and findings ter studying about the capital budgeting process o f MNC and case study o f Af ter Grameenphone
ltd ,we have concluded that the objective and purpose o f the report have
been per f ormed ormed and the a practical project was made. We have learnt theprocess and its application to the multinational corporation in perspective o f Bangladesh. We have identif ied ied the NPV f rom rom diff erent erent sector o f capital budgeting f rom rom the case. We have got some negative aspect which provide the in f ormation ormation to f orecast orecast the f urther urther investment prof it it and to take decision about the investment. The outcomes f rom rom the calculation of capital budgeting of a example of grameenphone grameenphone are verif ied ied f rom rom diff erent erent aspects. The net present value as parent company , the result was not satisf actory. actory. From its cash f lows lows and othe f inancial inancial conditions we have known that the amount of cashf lows lows and amount o f remitted revenue was not positive. So the company should not make f urther urther investment according to this this case, Or not to continue the business as the subsidiary company.
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Bibliography 1.
O fficial
Web site of GRAMEENPH ONE LIMITED, www.grameenphone.com
2. Grameenphone Grameenphon e, Annual Report, Year of 2008,200 7,2006,2005.2004. 7,2006,2005 .2004. 3. Dr.
H.
M.
Mosarof
Hossain.
Associate
Professor,
Department
of
Finance,University of Dhaka. 4. Erik Aas, Managing Director of GrameenPhone, 5. Dr. Farid Ahmed , Audit Report, year of 20 07. 6. International Financial Management by Jeff Madura. 7. Business Communication Communication by Lesikar. 8. Wikipedia.
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