Strategic Accounting Issues in

Multinational Corporations
Chapter out lines:
 Strategy and strategy formulation
 Accounting contributions to MNCs strategies
 Capital budgeting
 Operating budgets
 Evaluating the performance of operations
 Strategy
 A plan which reflect
future direction of
the organization
 A decision by MNC to
achieve market share
for its products is
strategic decision
Strategy formulation

 Deciding on the goals

of the organization and
strategies for achieving
those goals
Accounting contributions to
MNCs strategies

Accounting in MNCs

Strategy formulation Strategy implementation

Capital budgeting
 Reflect decision related to long term capital
investment such as : purchase new
equipment or expansion in new market
 Perfect capital investment usually results
from better capital budgeting
Capital budgeting process
1. Project identification and definition
2. Evaluation and selection
3. Monitoring and review
Capital budgeting techniques
1. Payback period
2. Return on investment
3. Net present value
4. Internal rate of return
Multinational capital budgeting
 Additional risks that affect future cash flow
of foreign investment project:
1. Political risk
2. Economic risk
3. Financial risk
Foreign investments from
project perspective includes:
1. Taxes
2. Rate of inflation
3. Political risk
Foreign investments from parent
company perspective includes:
1. The form of cash is remitted to the parent
2. Expected changes rate
3. Political risk
Case study
Project cash flow in China

Sales (25,000 units @ $50) 1,250,00

less: cost of Chinese material (25,000 units@$15) -375,000
less: cost of U.S. components (25,000 units@$8) -200,000
Gross Profit 675,000
less: depreciation ($750,000/ 5 ) 150,000
Pre-tax profit 525,000
less: 40% Chinese tax 210,000
Net Income 315,000
add back depreciation
: 150,000
Annual project cash flow 465,000
Project cash flow to Sedona:

Cash flow to Sedona is the same as annual project cash flow in China
because cash equal to depreciation may be returned freely to the U.S:
$465,000

Profit on Sedona’s sales of components,

$60,000 (25,000 units x $4 unit x .60 after tax)

Cash reduction on Sedona’s loss of current exports (25,000 units x $15 profit
contribution x .60 after tax): $225,000

At the end of 5 years no additional cash will be received in respect of building

and equipment as these will have been fully depreciated.
(a)

Flow in Year 15% PV PV of

Thousands factor flow
Cost of project $1,500 0 1.000 (1,500)
Project flows 465 1- 5 3.352 1,559
Profit on components 60 1- 5 3.352 201
Lost export profit -225 1- 5 3.352 (754)
WC recapture 750 5 0.497 373
-121

NPV is Negative $121,000. Therefore reject.

(b)

Since current exports will now be lost in any case, the lost profits on current exports are not
an incremental flow.

Flow in Year 15% PV PV of

Thousands factor flow
Cost of project $1,500 0 1.000 (1,500)
Project flows 465 1- 5 3.352 1,559
Profit on components 60 1- 5 3.352 201
WC recapture 750 5 0.497 373
633

NPV is now positive $633,000. Therefore accept.

Thank you