Exercise Question 1. Project vs. Parent's perspective NPV Your firm is located in Zurich, Switzerland and is looking to expand its operations to the UK. A potential UK investment yields the following expected after-tax cash flows in GBP: Year 0 Year 1 Year 2 Year 3 - GBP 900 mil GBP 400 mil GBP 400 mil GBP 400 mil Expected inflation is 13% in Switzerland and 6% in the UK. The required return for this type of project is 19.3% in CHF, and 22.3% in GBP. Assume that all parity conditions hold. 1.1. If the spot exchange rate is 1.4206 CHF/GBP, what is the NPV of the investment from the project's perspective? 1.2. If the spot exchange rate is 1.4206 CHF/GBP, what is the NPV of the investment from the parent's perspective? 1.3. If the spot exchange rate is 1.4206 CHF/GBP, what is the optimal action to take for this potential project? A. Accept the project and try to take advantage of the expected appreciation of the GBP. B. Accept the project and hedge against the expected depreciation in the CHF. C. Accept the project only if it is possible to lock in the GBP value in CHF terms. D. Reject the project, but keep looking for GBP projects due to the expected appreciation in the GBP. E. Reject the project because it has bad cash flows and the expected exchange rate is unfavourable