You are evaluating the proposed expansion of an existing subsidiary located in Switzerland. The cost of the expansion would be SF25 million. The cash flows from the project would be SF7.2 million per year for the next five years. The dollar required return is 13 percent per year, and the current exchange rate is SF1.72/CDN$. The going rate on Eurodollars is 8 percent per year. It is 7 percent per year on Swiss francs.
a. What do you project will happen to exchange rates over the next four years?
b. Based on your answer in (a), convert the projected Swiss franc flows into Canadian dollar flows and calculate the NPV.
c. What is the required return on Swiss franc flows? Based on your answer, calculate the NPV in Swiss francs and then convert to Canadian dollars.