You are evaluating a proposed expansion of an existing subsidiary located in Swi

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 5.9 million per year for the next five years. The dollar required return is 12 percent per year, and the current exchange rate is SF 1.09. The going rate on Eurodollars is 5 percent per year. It is 4 percent per year on Euroswiss.

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

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 5.9 million per year for the next five years. The dollar required return is 12 percent per year, and the current exchange rate is SF 1.09. The going rate on Eurodollars is 5 percent per year. It is 4 percent per year on Euroswiss.

Explanation / Answer

Conversion of cash flows into dollars

Conversion rate per dollar = SF1.09

Cash out flow in dollars = (SF 21M/SF 1.09)x$ = $ 19.27M

Annual cash inflows n dollars = (SF 5.90M/SF 1.09)x$ = $5.41M

Calculation of NPV

Dollar required rate of return = 12%

NPV = $5.41x3.605 - $19.27M

= $0.23 millions

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