You work for a 38firm whose home currency is the Euro (EUR) and that is considering a
Question:
You work for a 38firm whose home currency is the Euro (EUR) and that is considering a foreign investment. The investment yields expected after-tax Swiss Franc (SFR) cash flows (in millions) as follows: -SFR305 in Year O and SFR130 in Year 1. The forecast free cash flow will then increase by 5% per annum ove the next 3 years. At the end of 4 years, the life of the project will end. The expected rates of inflation in each country are constant per year: 4% in the Eurozone, and 9.00% in Switzerland. From the project's perspective the required return is 13.74%, while from the parent's perspective, the required rate of return is 8.52%. The spot exchange rate is EURO.9615/SFR
i. What is the NPV of the project from the project's perspective?
ii. What is the NPV of the project from the parent company's perspective?
iii. What is the correct course of action for the managers of the firm?
Expert Answer:
To solve this problem we will calculate the net present value NPV of the project from both the projects perspective and the parent companys perspectiv... View the full answer
