You are evaluating a proposed expansion of an existing subsidiary located in Switzerland. The cost of...

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Finance

You are evaluating a proposed expansion of an existingsubsidiary located in Switzerland. The cost of the expansion wouldbe SF 15 million. The cash flows from the project would be SF 4.1million per year for the next five years. The dollar requiredreturn is 11 percent per year, and the current exchange rate is SF1.06. The going rate on Eurodollars is 4 percent per year. It is 3percent per year on Euroswiss. Use the approximate form of interestrate parity in calculating the expected spot rates.
a. Convert the projected franc flows into dollar flows andcalculate the NPV. (Do not round intermediate calculations andenter your answer in dollars, not in millions, rounded to twodecimal places, e.g., 1,234,567.89)
b-1. What is the required return on franc flows? (Do not roundintermediate calculations and enter your answer as a percentrounded to 2 decimal places, e.g., 32.16.)
b-2. What is the NPV of the project in Swiss francs? (Do notround intermediate calculations and enter your answer in francs,not in millions, rounded to two decimal places, e.g.,1,234,567.89)
b-3. What is the NPV in dollars if you convert the franc NPV todollars? (Do not round intermediate calculations and enter youranswer in dollars, not in millions, rounded to two decimal places,e.g., 1,234,567.89)

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3.6 Ratings (289 Votes)

Year n 0 1 2 3 4 5 Interest rate Eurodollar Id 4 4 4 4 4 Interest rate Euroswiss Is 3 3 3 3 3 S01 Is Idn Spot rate SF 10600 10494 10389 10285 10182 10080 See Answer

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You are evaluating a proposed expansion of an existingsubsidiary located in Switzerland. The cost of the expansion wouldbe SF 15 million. The cash flows from the project would be SF 4.1million per year for the next five years. The dollar requiredreturn is 11 percent per year, and the current exchange rate is SF1.06. The going rate on Eurodollars is 4 percent per year. It is 3percent per year on Euroswiss. Use the approximate form of interestrate parity in calculating the expected spot rates.a. Convert the projected franc flows into dollar flows andcalculate the NPV. (Do not round intermediate calculations andenter your answer in dollars, not in millions, rounded to twodecimal places, e.g., 1,234,567.89)b-1. What is the required return on franc flows? (Do not roundintermediate calculations and enter your answer as a percentrounded to 2 decimal places, e.g., 32.16.)b-2. What is the NPV of the project in Swiss francs? (Do notround intermediate calculations and enter your answer in francs,not in millions, rounded to two decimal places, e.g.,1,234,567.89)b-3. What is the NPV in dollars if you convert the franc NPV todollars? (Do not round intermediate calculations and enter youranswer in dollars, not in millions, rounded to two decimal places,e.g., 1,234,567.89)