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4. Spartan Inc. (a US based MNC) is planning to open asubsidiary in Switzerland to manufacture shoes. The new plant willcost SF 1.0 billion. The salvage value of the plant at the end ofthe 4 yr economic life is estimated to be SF 200 million net of anytax effects. This plant will also call for extra inventory holdingof SF 300 million, and extra accounts payables of SF 200 million.Projected sales from this new plant are SF 800 million per year.The fixed costs are estimated to be SF 300 million per year, andthe variable costs are estimated to be SF 100 million per year.Depreciation on the new plant after accounting for the salvagevalue will be SF 300 million per year. The Swiss government willimpose a 40 % tax on the earnings. US govt. will not impose anytaxes. 100 % of the cash flows will be remitted to the parent. Theexchange rate is expected to be stable at $ 0.80 per SF. Spartanrequires 15 % return on its capital investments.

Please compute:

a) Net Investment Cost of the plant

b) Cash flows in years 1 through 4 of the project

c) Net Present Value of the project

d) Internal Rate of Return (IRR) of the project

e) Should the project be accepted or rejected? Why or whynot?

f) If the exchange rate scenario unfolds as follows

t = time 0 1 2 3 4

$0.80/SF $0.70/SF $0.70/SF $0.65/SF $0.55/SF

Re-compute the NPV. Is the project still acceptable? Why or whynot?

g) If the exchange rate scenario were to unfold as follows,

t=time 0 1 2 3   4

$0.80/SF $0.80/SF $0.90/SF $0.95/SF $1.00/SF

Re-compute the NPV. Is the project still acceptable? Why or whynot?