Question

You are evaluating a proposed expansion of an existing subsidiary located in Switzerland. The cost of the expansion would be SF 15 million. The cash flows from the project would be SF 4.3 million per year for the next five years. The dollar required return is 14 percent per year, and the current exchange rate is SF 1.08. The going rate on Eurodollars is 6 percent per year. It is 4 percent per year on Euroswiss. Use the approximate form of interest rate parity in calculating the expected spot rates.

  

a.	Convert the projected franc flows into dollar flows and calculate the NPV. (Enter your answer in dollars, not in millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

  

NPV

$

  

b-1.	What is the required return on franc flows? (Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. Do not round intermediate calculations.)

  

Return on franc flows

%

    

b-2.	What is the NPV of the project in Swiss francs? (Enter your answer in francs, not in millions of francs, e.g., 1,234,567. Round your answer to 2 decimal places, e.g., 32.16. Do not round intermediate calculations.)

  

NPV

SF

b-3.	What is the NPV in dollars if you convert the franc NPV to dollars? (Enter your answer in dollars, not in millions of dollars, e.g., 1,234,567. Round your answer to 2 decimal places, e.g., 32.16. Do not round intermediate calculations.)

Answer 1

a)
a. Converts franc flows into dollar flows and calculate NPV
SF current exchange rate	1.08
Rate of swiss dollar	6.00%
Rate of Euro Swiss	4.00%	-2.00%
Using Purchasing power parity		0.98
Current Exchange Rate = SF 1.08(1+(4%-6%)^t
Current Exchange Rate = SF 1.08x 0.98^t
The cashflows each year in US dollar terms will be
	Year	Cashflow in SF	Exchange rate	Cashflow in US Dollars	PV $1 @ 14%	Present Value
	0	-15,000,000	1.08	-$13,888,888.89	1.0000	-$13,888,888.89
	1	4,300,000	1.06	$4,062,736.21	0.8772	$3,563,803.69
	2	4,300,000	1.04	$4,145,649.19	0.7695	$3,189,942.44
	3	4,300,000	1.02	$4,230,254.27	0.6750	$2,855,301.14
	4	4,300,000	1.00	$4,316,585.99	0.5921	$2,555,765.43
	5	4,300,000	0.98	$4,404,679.59	0.5194	$2,287,652.55
					NPV	$563,576.36
b. Rate of return on Franc flows
Rate = 1.14 x (1+(4%-6%) )-1	11.72%
c. NPV in Swiss Franc
	Year	Cashflow in SF	PV Sf1 @ 11.72%	Present Value SF
	0	-15,000,000	1	-15,000,000.00
	1	4,300,000	0.8951	3,848,907.98
	2	4,300,000	0.8012	3,445,137.83
	3	4,300,000	0.7171	3,083,725.23
	4	4,300,000	0.6419	2,760,226.67
	5	4,300,000	0.5746	2,470,664.76
			NPV	608,662.47