However, what is being offered here is a cellular service, where the market is likely to be with expatriates, diplomats and wealthy local businessmen. Tariffs are therefore unlikely to be subject to the same amount of political pressure. Hotels, breweries and coffee production. For the time being, the government is not considering privatising services such as post, railways or the provision of basic telecommunications (this is mainly the fixed-line, voice telephony service). It also deals with the capital budgeting decision, method of financing and the problem of determining a discount rate for international investment decisions. Background Zenobia is a developing country situated on the coast of Africa. Very few projects have zero inter-temporal correlations, and most of them are dependent to some extent on what has happened in a previous year. In theory, projects should be evaluated using a specific risk-adjusted discount rate which reflects the risk. Expropriation risk, which can never be ignored in developing countries, is difficult to diversify and even more difficult to assess, and companies tend to stay out of countries where such risk is high. GTI is currently all equity financed and therefore has substantial debt capacity. Even though it is a service company, it will own a number of assets for the provision of telecommunications services. It will also own the right to future income generation on networks which it has installed, within the terms of its licences and agreements. On the face of it, GTI would be sensible to take the IFC offer of a. In order to determine a discount rate for a project we should use a proxy' company's beta and include this in the capital asset pricing model. In practice this is almost impossible to do, particularly in a developing country. Case Study Capital Budgeting In the remaining sections of this article we use a case study to explore further the issues raised in previous sections. The case involves an international company investing in a (fictitious) developing country.

“Implicit in the calculations is a suggestion that charges for telecommunication services will be increased in local currency terms to allow for inflation and devaluation. Technically this is quite acceptable, but there is a political risk that the government may.”
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It has converted all currency cash flows from the project into US and will discount them at a US-denominated discount rate to generate a US NPV). The choice of this method is common in such circumstances.

For the purposes of evaluation, GTI assumes this annual net cash flow will be maintained indefinitely from year 6 onwards on a network of 10,000 lines. The figures are, of course, an extreme simplification of what would be a complex.