Define political risk into the capital budgeting process, Financial Management

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How would you incorporate political risk into the capital budgeting process of foreign investment projects?

One method is to adjust the cost of capital upward to imitate political risk and discount the supposed future cash flows at a higher rate. On the other hand, one can subtract insurance premium for political risk from the expected future cash flows and make use of the usual cost of capital that is applied to domestic capital budgeting.

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