You are evaluating a proposed expansion of an existing subsidiary located in Swi
ID: 2749286 • Letter: Y
Question
You are evaluating a proposed expansion of an existing subsidiary located in Switzerland. The cost of the expansion would be SF 18 million. The cash flows from the project would be SF 5.0 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 5 percent per year on Euroswiss. Use the approximate form of interest rate parity in calculating the expected spot rates.
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))
What is the required return on franc flows? (Round your answer to 2 decimal places. (e.g., 32.16))
What is the NPV of the project in Swiss francs? (Enter your answer in thousands of francs, not in millions. (e.g., 1,234,567). Round your answer to 2 decimal places. (e.g., 32.16))
What is the NPV in dollars if you convert the franc NPV to dollars? (Enter your answer in thousands of dollars, not in millions. (e.g., 1,234,567). Round your answer to 2 decimal places. (e.g., 32.16))
b.
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))
Explanation / Answer
Solution:
B
Convert the projected franc flows into dollar flows and calculate the NPV
Expected spot = (1.07) + (1+(0.05-.006)^y)
(1.07)(.99)^y
Y
SF
Expected spot
US $
DF "12%
PV
0
-18000000
1.0700
-16822429.91
1
-16822429.9
1
5000000
1.0593
4720098.178
0.8928571
4214373.373
2
5000000
1.0487
4767775.937
0.7971939
3800841.787
3
5000000
1.0382
4815935.29
0.7117802
3427887.614
4
5000000
1.0278
4864581.101
0.6355181
3091529.234
5
5000000
1.0176
4913718.284
0.5674269
2788175.716
NPV
500,377.82
c-1
Required return on swiss franc = 1.12 (1+(.05-.06))-1
10.88%
c-2
NPV of the project in Swiss francs
NPV in us $ X 1.07 = (500377.82*1.07)
535,404.26
c-3
NPV in dollars if you convert the franc NPV to dollars
NPV in SWISS FANC X 1/1.07 = 535404.26*1/1.07
500,377.82
B
Convert the projected franc flows into dollar flows and calculate the NPV
Expected spot = (1.07) + (1+(0.05-.006)^y)
(1.07)(.99)^y
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