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Case
| HBS Case Collection
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2006
(Revised from original 2003 version)
Globalizing the Cost of Capital and Capital Budgeting at AES
by
Mihir A. Desai and Douglas Kurt Schillinger
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Abstract
With electricity generating businesses around the world, AES Corp. is seeking a methodology for calculating the cost of capital for its various businesses and potential projects. In the past, AES used the same cost of capital for all of its capital budgeting, but the company's international expansion has raised questions about this approach and whether a single cost of capital adequately accounts for the different risks AES faces in its diverse businesses and diverse environments. The company recently suffered heavy losses from currency devaluations in South America and regulatory changes in other countries. The director of the corporate planning group is developing a methodology for taking account of different country and project risks, and the case allows students to use this methodology to calculate the cost of capital for 15 different projects around the world. Students must consider how a global firm can account for differing risks in evaluating its international operations and in investing abroad. To obtain executable spreadsheets (courseware), please contact our customer service department at custserv@hbsp.harvard.edu.
Keywords: Multinational Firms and Management;
Risk Management;
Capital Budgeting;
International Finance;
Business Growth and Maturation;
Cost of Capital;
Risk and Uncertainty;
Emerging Markets;
Supply and Industry;
Governing and Advisory Boards;
Valuation;
Activity Based Costing and Management;
Energy Industry;
South America;