You are evaluating a proposed expansion of an existing subsidiary located in Swi
ID: 2760047 • Letter: Y
Question
You are evaluating a proposed expansion of an existing subsidiary located in Switzerland. The cost of the expansion would be SF 21 million. The cash flows from the project would be SF 5.5 million per year for the next five years. The dollar required return is 12 percent per year, and the current exchange rate is SF 1.07. The going rate on Eurodollars is 6 percent per year. It is 3 percent per year on Euroswiss. Use the approximate form of interest rate parity in calculating the expected spot rates. b. Convert the projected franc flows into dollar flows and calculate the NPV. c-1. What is the required return on franc flows? c-2. What is the NPV of the project in Swiss francs? c-3. What is the NPV in dollars if you convert the franc NPV to dollars?Explanation / Answer
Answer b
Year
Cashflows (million SF)
1$ exchange rate
Cashflows (million $)
Dis factor @12%
Discounted cashflow
0
-21
1.07
-19.63
1
-19.63
1
5.5
1.04
5.29
0.892857143
4.72
2
5.5
1.01
5.44
0.797193878
4.34
3
5.5
0.98
5.60
0.711780248
3.99
4
5.5
0.95
5.77
0.635518078
3.66
5
5.5
0.93
5.93
0.567426856
3.37
NPV (in milliom $)
0.46
Answer C-1
Required return in SF will be 12%*1.07 = 12.84%
Answer C-2
Year
Cashflows (million SF)
Dis factor @12.84%
Discounted cashflow
0
-21
1
-21.00
1
5.5
0.89
4.87
2
5.5
0.79
4.32
3
5.5
0.70
3.83
4
5.5
0.62
3.39
5
5.5
0.55
3.01
NPV (in milliom SF)
-1.58
Answer C – 3
NPV in $ = -1.58/1.07 =-1.48
Year
Cashflows (million SF)
1$ exchange rate
Cashflows (million $)
Dis factor @12%
Discounted cashflow
0
-21
1.07
-19.63
1
-19.63
1
5.5
1.04
5.29
0.892857143
4.72
2
5.5
1.01
5.44
0.797193878
4.34
3
5.5
0.98
5.60
0.711780248
3.99
4
5.5
0.95
5.77
0.635518078
3.66
5
5.5
0.93
5.93
0.567426856
3.37
NPV (in milliom $)
0.46
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.