years; it is the recommended practice, as forecasting different exchange rates for each
year will not make the forecasts more “accurate.”
(ii) Timing of Cash Expenditures. A few additional observations about capital bud-
geting in a multinational environment may be appropriate. The timing of cash ex-
penditures of major projects becomes even more crucial than in a domestic environ-
ment. As the parent company’s strategies are put together, all matters are considered
in terms of the parent company’s currency, say the U.S. dollar. If, for example, we
are in favor of a project costing $2 million for Country X, with the financing in local
currency to be spread over the next two years, a conscious decision must be made as
to how to deal with the vagaries of exchange rate fluctuations. The cost of the proj-
ect is likely to be more than $2 million or less than that amount, but it is most un-
likely to come in at exactly $2 million. The company may want to consider hedging
in such a way that the exchange rate is locked in; this is a financial decision, separate
and apart from capital budgeting.
(iii) Regional Budget Retention. In the multinational environment, there is a budget
technique which is utilized to overcome major uncertainties, not only those related to
fluctuating exchange rates. These uncertainties may relate to cash availability prob-
lems, to changing market conditions, to procurement difficulties, and to many other
situations. Under such circumstances, the region or higher corporate level may wish
to retain budget funds for release at a later time. Exhibit 25.4 illustrates the capital
budget for the Europe region, showing individual country budgets for the United
Kingdom, France, Germany, and Italy, adding up to PC($) 35,000. However, the total
25.5 BUILDING THE CAPITAL BUDGET 25 • 7AFFILIATE B
Capital Budget
20X0
Exchange
PC Rate LCManufacturing 3,000 PC 1 LC 2 6,000
Marketing 5,000 10,000
Transportation __2,000 __4,000
Total 10,000____ 20,000____
Objectives
20X0–20X2
20X0 20X1 20X2
PC LC PC LC PC LCManufacturing 3,000 6,000 2,000 4,000 2,000 4,000
Marketing 5,000 10,000 4,000 8,000 6,000 12,000
Transportation __2,000 __4,000 1,000_ __2,000 __3,000 __6,000
Total 10,000____ 20,000____ __7,000 __14,000__ __11,000__ __22,000__
Exhibit 25.3. Capital Budget and Objectives.