As a German company, you are evaluating a proposed expansion of an existing subsidiary located in Switzerland. The cost of the expansion would be SFr 27.0 million. The cash flows from the project would be SFr 7.5 million per year for the next 5 years. The euro required return is 13 per cent per year, and the current exchange rate is SFr 1.48/€. The going rate on EURIBOR is 8 per cent per year. It is 7 per cent per year on Swiss francs.

(a) What do you project will happen to exchange rates over the next 4 years?

(b) Based on your answer in (a), convert the projected franc flows into euro cash flows and calculate the NPV.

(c) What is the required return on franc cash flows? Based on your answer, calculate the NPV in francs and then convert to euros.