2. 15.

Capital budgeting [LO 21.2] You are evaluating a proposed expansion of an existing subsidiary located in Switzerland. The cost of the expansion would be SF 13.8 million. The cash flows from the project would be SF 3.9 million per year for the next five years. The dollar required return is 12 per cent per year, and the current exchange rate is SF 1.09. The going rate on Eurodollars is 5 per cent per year. It is 4 per cent per year on Euroswiss.

1. What do you project will happen to exchange rates over the next four years?

2. Based on your answer in (a), convert the projected franc flows into dollar flows and calculate the NPV.

3. What is the required return on franc flows? Based on your answer, calculate the NPV in francs and then convert to dollars.