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 5.6 million per year for the next five years. The dollar required return is 10 percent per year, and the current exchange rate is SF 1.08. The going rate on Eurodollars is 4 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.

b-1. What is the required return on franc flows?

b-2. What is the NPV of the project in swiss francs?

b-3. What is the NPV in dollars if you convert the franc NPV to dollars?

Explanation / Answer

a) Cost in dollars = 21,000,000 x 1.08 = 22,680,000

Annual cash flows = 5,600,000 x 1.08 = 6,048,000

NPV = -22,680,000 + 6,048,000 / 1.1 + 6,048,000 / 1.1^2 + 6,048,000 / 1.1^3 + 6,048,000 / 1.1^4 + 6,048,000/1.1^5 = $246,678

b1) Returns on franc flows = Dollar Returns x (eurodollar rate / euroswiss rate) = 10% (1 + x 4%/3) = 10.13%

b2) NPV in SF = - 21m + 5.6 / 1.1013 + 5.6 / 1.1013^2 + 5.6 / 1.1013^3 + 5.6 / 1.1013^4 + 5.6 / 1.1013^5

= 156,295 SF

b3) NPV in dollars = 156,295 x 1.08 = $168,798

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.