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Analyse the prospects and the problems for a Multi National Enterprise who proposes to make a Foreign Direct Investment

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Introduction

AC308 International/Multinational Management and Accounting Part A Briefing This report will analyse the prospects and the problems for a Multi National Enterprise who proposes to make a Foreign Direct Investment, therefore many factors will need to be considered by the MNE, as this is arguably one of the most important decisions that faces a multinational company (Demirag and Goddard 1994). This is namely because of the large capital outlay over a duration of time, a decision once made that cannot be easily reversed. Company Background British American Tobacco is a large Multi National Enterprise established in 1902 by consolidating two companies American Tobacco co. and the Imperial Tobacco of the UK this was hoped to end an intense trade war, 'Under the agreement, the two companies will not trade in each other's domestic markets and acquire the right to use each other's brands and trade marks in their own territory. Imperial Tobacco's and American Tobacco's businesses outside the 'home' markets of the UK and US are transferred to British American Tobacco'. Then in 1911 the American tobacco Co divest its shares and the company becomes listed on the London Stock Exchange. Country Background Country of choice is the northern African country of Libya which for some time has been sanctioned by both the US and the UN, its tobacco industry is state owned, however articles in the October 2003 country report have made suggestions that this will soon become privatised. ...read more.

Middle

The Dinar was maintained at this rate until March 1986 floating rate linked to the SDR. This move resulted in a 10-percent decline in the value of the Dinar, but has served to make it stable even though it has devalued it will in the long term draw foreign investment and therefore improve the financial, and global situation of the country. Other barrier's will be posed as the world has an educated awareness of the health risk associated with smoking and these may result in specific tax regulations put in place on cigarettes. Political Risk The importance of political risk needs to be considered but despite the extreme consequences very little time or money is invested in the research that this area deserves, many authors have written on this matter on both sides of the Atlantic, Rummel and Heenan(1978) they suggest that ad hoc methods are still employed, as Kobrin stated in 1979 it is known that this risk exists but analysis of this is superficial and subjective therefore it is not incorporated in any of the decision making apparatus. But looking at the recent turn of events since September 11th and the Iraq war, it proves just how crucial this should be in the decision making process. Before political risk can be quantified it must be defined Shubik (1983) differentiates between political risk and uncertainty, the paper by Rummel and Heenan (1978). ...read more.

Conclusion

Investment appraisal, performance evaluation, and other decision-making techniques of management accounting would greatly benefit from harmonisation. A good example of the need for harmonisation comes about in the inventory valuation, in three main trading countries Japan, UK and US different methods are used, and these differences can have a large effect on earnings or shareholders equity making the accounts from different countries little use when comparing their position in order to make an investment decision. Finally if all of this takes place then the cost of capital should fall due to the reduced risk to investors. Appendix 1 2002 2003 2004 2005 Oil Exports (US$bn) 10.7 12.9 9.3 9.6 Consumer price Inflation (av) 1.1 1.7 1.9 2.7 Appendix 2 CAPM, Ri =Rf +�(Rm - Rf) Ri is the CAPM (expected return, Cost of capital) Rf is the risk-free rate of return (12%) Rm is the expected return on market portfolio (18%) And � is the Beta (the systematic risk) (0.5) 12% + 0.5(18% - 12%) = 15% Appendix 3 10-year investment with a Cost of Capital of 15% (as established by the CAPM (it is fairly high due to the lack of financial information in Libya) and the flowing cash flows: NPV calculation Year Cash flow Present value factor (15%) Present Value 0 (225,000,000) 0 (225,000,000) 1 25,000,000 0.87 21,750,000 2 30,000,000 0.756 22,680,000 3-10 60,000,000 (5.02 - 1.63) 3. ...read more.

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