ezto.mheducation.com value: 10.00 points You are evaluating a proposed expansion

Question

ezto.mheducation.com value: 10.00 points 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 5.6 million per year for the next five years. The dollar required return is 12 percent per year, and the current exchange rate is SF 1.06. The going rate on Eurodollars is 5 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 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, o.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.) NPV References eBook& Resources Worksheet Learning Objective: 21-02 Purchasing power parity, interest rate parity, unbiased forward rates uncovered interest rate parity, and the international Fisher effect and their implications for exchange rate changos

Explanation / Answer

a) 1 2 3 4 5 Cash flows in francs 5600000 5600000 5600000 5600000 5600000 Exchange rate (SF/$) =1.06*((1+(0.03-0.05))t^ = 1.06*0.98^t 1.0388 1.0180 0.9977 0.9777 0.9582 Cash flows in $ 5390835.58 5500852.63 5613114.93 5727668.30 5844559.49 PVIF at 12% 0.89286 0.79719 0.71178 0.63552 0.56743 PV at 12% 4813246.05 4385246.04 3995304.34 3640036.75 3316360.01 Sum of PV of cash inflows 20150193.19 Less: Initial investment (21000000/1.06) 19811320.75 NPV 338872.44 b-1) Required return on franc flows = 1.12*[1+(0.03-0.05)]-1 = 9.76% b-2) 1 2 3 4 5 Cash flows in francs 5600000 5600000 5600000 5600000 5600000 PVIF at 9.76% 0.91108 0.83006 0.75625 0.68901 0.62774 PV at 9.76% 5102040.82 4648360.80 4235022.60 3858438.95 3515341.61 Sum of PV of cash inflows 21359204.78 Less: Initial investment 21000000.00 NPV 359204.78 b-3) NPV in francs converted to $ = 359204.78/1.06= 338872.44

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