Cash Flow Estimation and Cost of Capital for Overseas Projects

Several issues concerning foreign project evaluation are critically examined. The paper suggests that the point of view for analysis, cost of capital and cash flow estimation be internally consistent. Three points of views of analysis, local, global, and parent specific, are identified and various inconsistencies in the estimation of the initial outlay and project cash flows are identified. The elimination of the inconsistencies is discussed. It is argued that the treatment of blocked funds is relevant only from the parent specific point of view. A number of alternatives for the estimate of the terminal value is also suggested. The differences between the parent specific point of view and the global and local views are sharply drawn. An integrated scheme is also presented to underscore the need for consistency in evaluating foreign investments.