 The principles of capital budgeting for domestic companies are equally applicable to the capital budgeting decisions by a foreign corporation. Let's see how it works. There are two approaches in this regard. The one is called as the home currency approach and the other is called as the foreign currency approach. In the home currency approach there are two steps. The first refers to the conversion of the foreign currency denominated cash flows into the home currency denominated cash flows. This is the first step. The second is to use home currency's discount rate to discount the converted cash flows in order to compute the net present value of the project. The second approach is the foreign currency approach. It has little more steps. The first is to determine the required return on foreign currency denominated investment. In the second step we need to discount cash flows on this investment to find NPV in the foreign currency denomination. At the third step we need to convert the foreign currency denominated NPV into home currency denominated NPV. And finally we need to convert foreign market required rate of return to the home country's required rate of return. To understand the mechanics of these two approaches we have an example. We assume that there is a US company that owns a project in France. The project cost at its launch is 2 million euro and annual expected cash flows over the three years life of the project are 0.9 million per year. The correct spot exchange rate for euro is equal to 0.5 euro. So the euro is worth equal to 2 dollars. This free rate for US is 5% and in France it is 7%. The company's weighted average cost of capital of such type of dollar investment is equal to 10%. Now the question is that should the company take this investment. In home currency approach we need to work in two steps as I have earlier said. First we need to determine an expected exchange rate on this particular project. And for that purpose we has an equation. That equation has an output of 0.5 which is the spot exchange rate and we need to multiply this with the differential of the risk free rates. The one is we have 7% second we have 5%. So this is the expected exchange rate. Now using this expected exchange rate we need to determine the year by year expected exchange rate. In order to do that we need to compound the already computed exchange rate for every year. For first year, for second year and for third year and in this way we will have the all three years expected foreign exchange rates. Once we have done this we need to multiply these yearly expected exchange rates with the yearly cash inflows and outflows and that we have in our last part in its fourth column we can see where we have dollar converted cash flows equivalent to 4 million dollars 1.76 for year 1, 1.73 million for year 2 and 1.7 million dollars for year 3. And with having these computed annual cash flows we need to determine the net present value but for that purpose we need to discount the computed annual cash flows and for that purpose we have already a discount rate of 10% and using this step we compute the net present value equal to 0.5 million US dollars. As this value is a positive value so we can conclude that the project appears to be profitable being having the positive net present value. Now in second approach where we can use the foreign currency approach we will go for a detailed procedure. In first step we need to convert 10% of our required return on dollar denominated cash flows to a rate that is suitable for the Euro denominated cash flows for that purpose we need to first determine the difference due to the international future effect and the difference is between the two risk periods of US and France the difference is equal to 2%. Now we will add this difference to our required rate of return in order to compensate for the greater Euro inflation rate as the inflation is higher in France. Now we need to compute net present value of Euro denominated cash flows at this 12% discount rate and the net present value is equal to 0.16 million euros. In the next step we need to convert this Euro denominated net present value into 2 days present value at the exchange rate of 0.5 and this gives us the net dollar denominated net present value of 0.3 million and we see that we have the same dollar denominated net present value as we have computed in our earlier first approach there is an issue that is on the remittances by foreign operations of a multinational to its parent company in the home country now cash flows from a foreign project can heavily or substantially differ from the amounts to be remitted to the home country in the home country to the parent company there are certain forms of these remittances that includes dividends management fee for central services offered by the head office in the home country royalties for using brand names or trade names or other patents firms should consider potential control of foreign governments on the remittances in certain countries there may be restriction on the foreign companies on remittances on profit earning in those particular companies this means there may be some part of funds that cannot be transferred by a foreign operations entity to its parent in the home country and these funds are then called as blocked funds