Impact of Repatriation Tax on US Investment

This assignment delves into the impact of repatriation tax costs on US multinational investment strategies. It examines various academic papers that analyze this phenomenon, including studies on the relationship between corporate social responsibility and investment recommendations, the influence of private investment on employment and output in the manufacturing sector, and the dynamic interplay between CEO investment cycles and capital structure.

Construct a
investment pitch
1

Table of Contents
Investment pitch ..................................................................................................................................3
Description of the project................................................................................................................3
Funding need and financial instruments available to meet the project............................................4
Assuming project return during life time.........................................................................................5
Assessing project strength and risk:.................................................................................................5
Recommendation.............................................................................................................................9
Risk mitigation:................................................................................................................................9
CONCLUSION..................................................................................................................................10
REFERENCES...................................................................................................................................12
Index of Tables
Table 1: Calculation of payback period of project A and project B ....................................................6
Table 2: Calculation of accounting rate of return ................................................................................7
Table 3: Calculation of net present value of project A ........................................................................8
Table 4: Calculation of net present value of project B.........................................................................8
Table 5: Calculation of internal rate of return .....................................................................................9
2

INVESTMENT PITCH
Investment pitch refers to a list of activities which investors need to persuade to identify
potential investment opportunities and thereby, to determine the most viable or profitable proposal
for business (Subedi, 2016). Looking at the present competitive and global business era, every
investment carries out some risk henceforth, it is essential for businesses to make evaluation of all
the investment proposals so as to assess their potential worthiness. Harmful capital decisions can
create negative impact on the organizations and may lead to business failure as well. However,
better investment decisions can enhance the competitive strength and achieve rate of high success
and growth in the market. Major aim of investment pitch is to ensure the investment of funds in the
profitable project which will give higher returns to the firm (Ioannou and Serafeim, 2015). Thus,
companies will be able to meet their shareholder's expectations by giving them good returns.
Investment pitch is mainly used by businesses to take long term investment decisions. In the present
globalized market, enterprises have to make investment in new plant and machinery, land and
building, introducing new product, expanding operations, new technology, etc. Therefore, they can
make use of investment appraisal techniques to create their investment pitch or portfolio effectively.
While constructing investment pitch, it needs to be considered by the investors that all future
investment opportunities must be identified clearly. Therefore, they can evaluate the risk and returns
that are associated with each project and create an excellent investment portfolio. Considering
investment pitch continuously enables the firms to generate high free cash flow by making
investment in worthy proposal (Takahashi, 2016). Before making capital decisions, initially,
entrepreneur needs to determine various opportunities and identify funding requirement which he
will need to invest. This project report mainly focuses on different types of financial instruments
which an entrepreneur can undertake to invest the funds in project. Moreover, different types of
capital investment appraisal techniques will be implemented to assess strength and risk of the
project. It will help to select viable or worthy project from the available alternatives.
Description of the project
In the present report, entrepreneur desires to invest funds in new technology to bring
innovation in the operations. This proposed technological advancement will greatly assist the firm
in automation of operations which results in less requirement of labour force. Through this
advancement, company can serve the best services to customers. In order to acquire new
technology, it has been identified that there are two capital proposals available to the entrepreneur.
The initial investment of project A is estimated to £675000 while the cost of project B is £800000.
However, both the project life will have an equal life time of 5 years. Funds will be invested in the
3

year 2016 and project will generate return from the next year 2017 to 2021 through sales operations.
It will definitely enhance the competitive strength and strategic capability of entrepreneur through
which he can compete in a more effective way with the rivalry organizations. By this, firm can
achieve high success, growth and assure long run sustainability as well.
Funding need and financial instruments available to meet the project
As discussed earlier, entrepreneur needs £675000 to invest in the project A. However, in
project B, initial investment will be £800000. Thus, if firm needs to evaluate the risk and returns of
both the projects then it is the primarily need to have adequate availability of funds to invest. It is an
important aspect because without having sufficient quantity of funds, business will not be able to
undertake any project even if it is the most viable proposal. Assessment of available funds helps to
eliminate such project whose initial investment need is beyond firm's ability because of capital
constraints. There are different types of financial instruments that are being available to an
entrepreneur to meet their long term capital need. These are enumerated as below:
Loan capital: It is one of the most common financial sources which are used by most of the
organizations to raise money. By borrowing money in the form of bank loan, firms can enhance the
availability of funds. Funds can be borrowed by financial institutions and banks at an implied
interest rate (Zugravu-Soilita, 2015). The advantage of loan capital is that it helps to minimize the
corporation tax obligation because interest payment is considered as allowable expenditure for tax
determination. On the other hand, it helps to meet long term capital need while repayment of capital
can be done in equal periodical instalments. On the contrary, lenders may demand for collateral
security to secure their funds. Furthermore, it is mandatory for the business to pay instalments
timely whether they have profit or loss in the business. In other words, it imposes fixed financial
burden to an entrepreneur.
Equity capital: Money can also be raised by issuing shares in the market. In this regard, firm
can sell their ownership to the investors by selling equity (ordinary) shares. Higher the public
subscription; it enables the firm to gather higher capital or vice-versa. Investors will invest funds so
as to get maximum returns on their funds. Hence, they will assess the risk-reward relationship to
take better quality of decisions (Yaprak and Cavusgil, 2015). The advantage of collecting money
through equity capital is that company is not liable to make regular payment of dividend to the
shareholders. Henceforth, in the case of loss, it can take decisions for not distributing dividends to
investors. On the contrary, voting rights of shareholders give him power or authority to take part in
the decision making. In other words, it diversifies the controlling rights to shareholders.
Retained earnings: It is another suitable financial source which is made available to the
4

corporation to meet their capital requirement. Amount of profit remained after making payment of
return to the shareholders is called retained earnings (Sundaresan, Wang and Yang, 2015). By
ploughing back of profits in the potential capital project, it can satisfy the capital requirement to an
available extent. Major benefit of this is that there is no financial cost of retained earnings like
interest and dividend. Moreover, it does not change ownership structure of the organization.
Assuming project return during life time
It has been stated clearly that both the project will have an equal time period of 5 years. Both
project A and project B will generate return through sales operations during its estimated life.
Return of both the project has been stated below:
Project A:
Year Cash inflow (In £)
2016 (Initial investment) -675000
2017 92000
2018 148500
2019 210500
2020 280000
2021 428000
Project B:
Year Cash inflow (In £)
2016 (Initial investment) -800000
2017 115000
2018 168000
2019 240000
2020 364500
2021 452000
Assessing project strength and risk:
As already said, that every investment carry some sort of risk with itself thus, it is necessary
for the entrepreneur to assess risk and return involved in proposed project. So that, they can select
such project in which risk is minimum and return is maximum. By mitigating risk, firm will be able
to enlarge their profitability through getting maximum return on potential investment. Investment
appraisal techniques evaluate the attractiveness of the capital projects and determine viable proposal
(Attwood, 2016). This technique are also known as capital budgeting techniques which comprises
5

both discounted and non-discounted techniques. The process of capital budgeting includes
generation of ideas, assessment, authorisation, implementation, control and post auditing. Out of
these, discounted cash flow (DCF) techniques are considered superior than non-discounted
techniques because it consider time value of money to determine potential value of cash inflows
during project's estimated life (Investment appraisal, 2009). This techniques evaluate potential
return in order to determine suitable project. Basically, there are four mathematical techniques of
investment that are payback period, accounting rate of return, net present value and internal rate of
return which are enumerated below:
Payback period: It is the length of time in which project will recover the initial investment,
called as payback period (PP) (Bottazzi, Da Rin and Hellmann, 2016). This method is very simple
and quite easy to interpret as according to its decisions rule, project which has shorter PP should be
select by the entrepreneur. It is because such project will get back its initial invested funds earlier
than other.
Table 1: Calculation of payback period of project A and project B
Initial investment £675000 £800000
Projecy life 5 year 5 year
Cash inflow ( In
£)
Cumulative cash
inflow( In £)
Cash inflow
( In £)
Cumulative
cash inflow
( In £)
2017 92000 92000 115000 115000
2018 148500 240500 168000 283000
2019 210500 451000 240000 523000
2020 280000 731000 364500 887500
2021 428000 1159000 452000 1339500
Project A: 3 year +(£675000-£4510000)£280000
3 year + (£224000/£280000)
3 year + 0.8
3.8 year
Project B: 3 year + (£800000-£523000)/£364500
3 year + (£277000/£364500)
= 3 year + 0.75
= 3.75 year
Interpretation: On the basis of above results, it can be seen that pp of project A and B are
3.8 year and 3.75 year. It reflects that B will generate its initial investment earlier than project A.
Henceforth, entrepreneur should undertake this project but still, there are several limitations of this
6

method. One of the most important limitation is it does not take into account the time value of
money to consider potential value of cash inflow. Moreover, this method do not consider all the
cash inflows generated over the project life. It is because payback period only payback period only
focuses on recovering initial cash outlay hence, do not pay focus on post pay back profitability
(Hanlon, Lester and Verdi, 2015). However, it may be possible that project whose PP is longer but
still having larger post payback profitability. In that case, another project should be consider more
beneficial as compare to other. Further, it ignore timing and size of net cash inflows. Due to this,
decision can not be taken only on the basis of PP.
Accounting rate of return: It is also known as return on capital employed (ROCE) which can
be determined by dividing average profit to the capital employed. In this regard, capital employed
can be calculated by subtracting depreciation from the initial investment (Handley and Limao,
2015). Thus, it is clear that accounting rate of return (ARR) express percentage of return which can
be acquired on the initial cash outlay. As per the selection criteria of ARR, entrepreneur must go for
the project whose ARR is higher over other.
Table 2: Calculation of accounting rate of return
Year Project A Project B
2017 92000 115000
2018 148500 168000
2019 210500 240000
2020 280000 364500
2021 428000 452000
Total profit 1159000 1339500
Average profit 231800 267900
Initial investment 675000 800000
ARR 34.34% 33.49%
Interpretation: As per the table, it can be observed that ARR of both the project A and B are
34.34% and 33.49% respectively. High ARR of project A indicates that there is a greater chance of
high return in project A as compare to project B. But still, this method contains several drawbacks,
one is it do not assume that money has time value over the period which is totally ignored by ARR
(Kvist, 2015). In addition, ignoring time and size of the cash inflows are also the limitation of ARR
in taking investment decisions.
Net present value: This method is consider more appropriate techniques of capital budgeting
because it allow the use of cost of capital relating to the project. Net present value (NPV) converts
potential cash inflows of the project into cash equivalents on the present day. It use an discounting
factor to determine present value and thereafter, sum of present value will be subtracted from the
7

initial cash outlay to determine NPV (Agrawal, Catalini and Goldfarb, 2015). Thus, this method
evaluate net return of the project. According the decision rule of NPV, project which NPV is higher
is consider more suitable proposal. With reference to the given projects, 10% discounting rate has
been identified appropriate for determining future values of cash inflow.
Table 3: Calculation of net present value of project A
Year Cash inflow
Discounted value @
10% Discounted cash flow
2017 92000 0.9091 83636.36
2018 148500 0.8264 122727.27
2019 210500 0.7513 158151.77
2020 280000 0.6830 191243.77
2021 428000 0.6209 265754.33
Total potential value 821513.50
Less: Initial investment 675000
Net present value 146513.50
Table 4: Calculation of net present value of project B
Year Cash inflow
Discounted value @
10% Discounted cash flow
2017 115000 0.9091 104545.45
2018 168000 0.8264 138842.98
2019 240000 0.7513 180315.55
2020 364500 0.6830 248958.40
2021 452000 0.6209 280656.44
Total potential value 953318.82
Less: Initial investment 800000
Net present value 153318.82
Interpretation: Presented table reflects that NPV of project A is £146513.50 whilst in case of
project B, it is £153318.82 respectively. It indicates that this project will generate higher return in
future therefore, entrepreneur must invest funds worth £800000 in project B. Apart from the
benefits of NPV, there is also some limitation. In the present dynamic and volatile market
conditions, determining an appropriate rate of discounting is very difficult task for the entrepreneur
(Ioannou and Serafeim, 2015). For instance, fluctuation in interest rate creates an huge impact on
the selection of discounting factor. Higher the discounting rate creates negative impact on cash
flows while lowering the discounting factor enhance present value of cash flows. As a result, NPV
will be greatly affected which influence investment decision of the firm to a great extent.
Internal rate of return: It is the discounting rate at which sum of cash inflows during project
life will be equal to the project cost. In other words, it can be said that discounting rate at which
8

NPV of the project is nil, is known as IRR (Subedi, 2016). In accordance with the selection criteria,
it has been stated that corporation must go for the project which IRR is comparatively higher over
other. The advantage of IRR is it takes into account the time value concept of money while
assessing the strengthness of proposed investment.
Table 5: Calculation of internal rate of return
Year Project A Project B
2016 (Initial investment) -675000 -800000
2017 92000 115000
2018 148500 168000
2019 210500 240000
2020 280000 364500
2021 428000 452000
IRR 16.40% 15.75%
Interpretation: As per the table, it can be seen that IRR of project A is higher to 16.40%
whereas in case of project B, it is only 15.75%. Henceforth, entrepreneur must select project A
because there is a large difference between IRR of project A to 16.40% and discounting rate of 10%.
But still, it becomes very difficult to take decisions when there are two IRR. In addition, IRR does
not provide assistance to evaluate net return of the project.
Recommendation
On the basis of above techniques, it can be recommended to the entrepreneur that it must
select project B. Although the initial investment of this project is higher but still, there is a
possibility of greater return worth £153318.82. On the other hand, conflicting results of IRR arisen
because of having different pattern of cash inflows during project life of 5 year (Handley and
Limao, 2015). Project B has been recommended because it takes into account both timing and size
of the cash flows which helps to assess economic worth. Thus, by investing funds worth £800000 in
project B, it can get backs its initial investment earlier and maximize their return as well. It enable
entrepreneur to maximize their profitability and ensure long run sustainability. Through this,
company can operate successfully in the competitive environment and enhance business growth.
Risk mitigation:
Capital budgeting techniques provides an estimation of potential results that can be arise
from investment. While, real business environment is highly volatile in which things do not remain
constant. Therefore, risk is always associated with every investment in which actual project return
may be different from the expected return. Risk mitigation is regarded as the process or strategies
that an investor can undertaken to eliminate investment risk (Attwood, 2016). By applying risk
mitigation strategies, investor can design an effective investment portfolio and and mitigate
9

exposure. There are several kinds of risk management strategies which entrepreneur can use,
enumerated below:
 Market risk refers to the chances in which market can respond negatively due to changes in
economic and political conditions like pricing pressure and fluctuation in exchange rate.
Such kind of risk can be mitigated by holding higher cash than minimum balance.
Moreover, it can be controlled by using diversified portfolio in which cash, bonds and stock
etc. can be combined (Karim and Yin, 2015).
 Company risk refers to situation in which company will perform worst hence, it will not be
able to compete effectively in the market. It can be prevented by diversification and
adequate availability of funds in the business.
 Industry risk refers to the possibility that industry can underperform the overall market due
to adverse external factors. In that case, entrepreneur can take assistance, advices and
suggestions of industrial specialists and investment advisor to minimize their investment
risk (Pan, Wang and Weisbach, 2016).
 Financial risk refers to the risk of inadequate margin, inability to take borrowings, risk of
high interest rate which can results in high financial cost etc. It can be eliminated by
enhancing efficiency, controlling cost and optimum use of resources etc. In addition,
entrepreneur always maintain a minimum level of margin of safety to manage operations
effectively.
 Apart from that, continuous monitoring and evaluation also enable enterprises to evaluate
their investment proposals. It provide assistance to take viable decisions to administrate their
cash inflows effectively. This in turn, absolute return for longer duration can be assured and
risk of capital loss can be neglected (Agrawal, Catalini and Goldfarb, 2015).
CONCLUSION
In conclusion of the entire research report, it can be said that investment appraisal
techniques play a key role in business to take decisions regarding capital expenditures. It enable
managers to determine most worthy project and thereby take appropriate investment decisions.
From the report, it has been inferred that discounted cash flow techniques are considered more
appropriate which use a discounting factor to take into account time value concept of money. In this
regard, NPV is the best technique which can be used to take viable investment decisions because it
identify net project return by taking into consideration the timing and size of cash flows. As per the
techniques used, project A is consider more worthy because of greater NPV. Along with this, report
concluded that industrial specialists suggestions, diversified portfolio of financial sources,
10

monitoring, maintaining margin of safety etc. are some of the strategies which entrepreneur can use
to mitigate their investment risk. By this, they will be able to get desired outcomes what they have
been expected through capital budgeting.
11

REFERENCES
Books and Journals
Agrawal, A., Catalini, C. and Goldfarb, A., 2015. Crowdfunding: Geography, social networks, and
the timing of investment decisions. Journal of Economics & Management Strategy. 24(2).
pp.253-274.
Attwood, T. K., 2016. An Active Investment Strategy for EMBnet: AGM workshop report, Oeiras,
June 2015. EMBnet. Journal. 21. pp.e867.
Bottazzi, L., Da Rin, M. and Hellmann, T., 2016. The importance of trust for investment: Evidence
from venture capital. Review of Financial Studies. pp.hhw023.
Handley, K. and Limao, N., 2015. Trade and investment under policy uncertainty: theory and firm
evidence. American Economic Journal: Economic Policy. 7(4). pp.189-222.
Hanlon, M., Lester, R. and Verdi, R., 2015. The effect of repatriation tax costs on US multinational
investment. Journal of Financial Economics. 116(1). pp.179-196.
Ioannou, I. and Serafeim, G., 2015. The impact of corporate social responsibility on investment
recommendations: Analysts' perceptions and shifting institutional logics. Strategic
Management Journal. 36(7). pp.1053-1081.
Karim, N. A. H. A. and Yin, K. Y., 2015. Assessing the Relationships between Private Investment,
Employment and Output in the Manufacturing Sector in Malaysia. Journal of Management
Research. 7(2). pp.422.
Kvist, J., 2015. A framework for social investment strategies: Integrating generational, life course
and gender perspectives in the EU social investment strategy. Comparative European
Politics. 13(1). pp.131-149.
Pan, Y., Wang, T. Y. and Weisbach, M.S., 2016. CEO investment cycles. Review of Financial
Studies. pp.hhw033.
Subedi, S. P., 2016. International investment law: reconciling policy and principle. Bloomsbury
Publishing.
Sundaresan, S., Wang, N. and Yang, J., 2015. Dynamic investment, capital structure, and debt
overhang. Review of Corporate Finance Studies. 4(1). pp.1-42.
Takahashi, H., 2016. Analyzing the Influence of Indexing Strategies on Investors’ Behavior and
Asset Pricing Through Agent-Based Modeling: Smart Beta and Financial Markets. In
Agent and Multi-Agent Systems: Technology and Applications . Springer International
Publishing.
Yaprak, A. and Cavusgil, S.T., 2015. Global Sourcing: An Overview of Offshore Investment
12

Strategies. In Proceedings of the 1989 Academy of Marketing Science (AMS) Annual
Conference . Springer International Publishing.
Zugravu-Soilita, N., 2015. How does Foreign Direct Investment Affect Pollution? Toward a Better
Understanding of the Direct and Conditional Effects. Environmental and Resource
Economics.pp.1-46.
Online
Investment appraisal, 2009. [Pdf]. Available through:
<https://www.icaew.com/~/media/corporate/files/technical/business%20and%20financial
%20management/special%20reports%20archive/sr27%20investment%20appraisal.ashx>.
[Accessed on 25th June, 2016].
Ioannou, I. and Serafeim, G., 2015. Investment appraisal techniques. [Online]. Available through:
<https://www.mygov.scot/investment-appraisal>. [Accessed on 25th June, 2016].
13