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

Question:

You are evaluating a proposed expansion of an existing subsidiary located in Switzerland. The cost of the expansion would be Fr 21 million. The cash flows from the project would be Fr 6.1 million per year for the next five years. The dollar required return is 12 percent per year, and the current exchange rate is Fr .94. The going rate on Eurodollars is 5 percent per year. It is 6 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 franc flows into dollar flows and calculate the NPV.
c. What is the required return on franc flows? Based on your answer, calculate the NPV in francs and then convert to dollars.

Exchange Rate
The value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars...