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 5.8 million per year for the next five years. The dollar required return is 12 percent per year, and the current exchange rate is SF 1.10. 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. a. Convert the projected franc flows into dollar flows and calculate the NPV. (Do not round intermediate calculations and enter your answer in dollars, not in millions, rounded to two decimal places, e.g., 1,234,567.89) b-1. What is the required return on franc flows? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b-2. What is the NPV of the project in Swiss francs? (Do not round 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 to dollars? (Do not round intermediate calculations and enter your answer in dollars, not in millions, rounded to two decimal places, e.g., 1,234,567.89)
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 5.8 million per year for the next five years. The dollar required return is 12 percent per year, and the current exchange rate is SF 1.10. 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. a. Convert the projected franc flows into dollar flows and calculate the NPV. (Do not round intermediate calculations and enter your answer in dollars, not in millions, rounded to two decimal places, e.g., 1,234,567.89) b-1. What is the required return on franc flows? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b-2. What is the NPV of the project in Swiss francs? (Do not round 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 to dollars? (Do not round intermediate calculations and enter your answer in dollars, not in millions, rounded to two decimal places, e.g., 1,234,567.89)
Chapter14: Multinational Capital Budgeting
Section: Chapter Questions
Problem 34QA
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Chap 21 Q 5
Transcribed Image Text: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 5.8 million per year for the next five years. The dollar required
return is 12 percent per year, and the current exchange rate is SF 1.10. 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.
a. Convert the projected franc flows into dollar flows and calculate the NPV. (Do not
round intermediate calculations and enter your answer in dollars, not in millions,
rounded to two decimal places, e.g., 1,234,567.89)
b-1. What is the required return on franc flows? (Do not round intermediate
calculations and enter your answer as a percent rounded to 2 decimal places,
e.g., 32.16.)
b-2. What is the NPV of the project in Swiss francs? (Do not round 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 to dollars? (Do not round
intermediate calculations and enter your answer in dollars, not in millions,
rounded to two decimal places, e.g., 1,234,567.89)
X Answer is not complete.
$ 5,467,519.23 X
a. NPV
b-1. Return on franc flows
b-2. NPV
b-3. NPV
SF
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