A capital-budgeting decision-The case of a multinational corporation operating in high-inflation countries

The situation considered is one in which a parent company based in the United States is making capital-budgeting decisions for a subsidiary operating in a high- inflation country. A numerical example of a lease vs. borrow problem is used to demonstrate the difficulties that are introduced in applying the standard solution to the problem in such a situation. It is shown that because of the existing tax code, inflation affects both the cash flow of a project and the discount rate. Thus, a correct analysis should consider all factors affected by inflation in order to reach the right decision.