Chapter 21: In Class Group Exercise You are evaluating a proposed expansion of an existing subsidiary located in Switzerland. The cost of the expansion would be SF 25 million. The cash flows from the project would be SF 6.9 million per year for the next five years. The dollar required return is 12 percent per year, and the current exchange rate is SF 1.17. The going risk free rate on dollars is 6 percent per year. It is 5 percent per year on Swiss francs. 1. What do you project will happen to exchange rates over the next four years? Will the exchange rates increase or decline? Does the SF appreciate or depreciate? Explain. 2. Based on your answer in (a), convert the projected franc flows into dollar flows and calculate the NPV. (Hint: Step 1 calculate the expected spot rate for each year using uncovered interest parity E[ST) = (So)[1 + (Rfc - Rus)]' and then convert the cashflow to dollars. 3. What is the required return on franc flows? (Hint: Rearrange the uncovered interest parity equation (using the International Fisher Effect) to calculate the Swiss Franc required return RRfc = (1+RRus) [1 + (Inflation Premium)] - 1) The inflation premium is the difference between the US risk free rate and the Swiss risk free rate. Based on your answer, calculate the NPV in francs and then convert to dollars. Which one of the following best illustrates an error which you, as a project manager, might make due to confirmation bias? confirmation blas? O Overestimating the best outcome expected from a project while underestimating the possibility of a less favorable outcome. O Assuming that a new project will be profitable since similar projects in the past were successful. O Assuming that your expectations of the future outcome from a project are more accurate than the expectations of others within your organization . Listening to the advice of subordinates with whom you agree while ignoring the advice of subordinates with whom you tend to disagree O Downplaying the cost of future failure of an existing project since the project has already paid for itself