In the recent past, the government has been aggressively wooing multinational companies to come and invest their resources in Kenya. Analyse the key decision areas that a financial analyst would have to advise a company that is considering making direct investment in Kenya and discuss the risks involved.

Advanced Financial Management Block Revision Mock Exams

Direct foreign investment involves capital budgeting/long term investment decisions. The main factors to consider would thus be concerned with:

Tax implications of foreign investment
Estimation of initial capital outlay and future cash in flows Evaluation of various types of risks involved Methods of financing the project/investment
Choice of appropriate cost of capital or discounting rate

The risks involved in direct foreign investment Multi-National Companies (MNCs)

Exchange risk – it has effects on imports and exports and will usually boarder of translation, transaction and economic risk.
Financial risk – due to uncertain cash flows, incomes and inflationary pressures
Political risk – the possibility that a political event will occur e.g change in governments which will unfavourably affect the business.
Business risk – occurs due to different economic conditions and competition from other local and Multi-National firms including imports.
Access to capital markets – the capital market may not be well-developed and its access may be restricted.
Government controls and regulations e.g. labour relations, sale price, product quality, non- repatriation of profits.
Taxation laws and procedures and cultural risk.

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