41 Capital Budgeting As a German company, you are evaluating a proposed expansion of an existing subsidiary located in Switzerland. The cost of the expansion would be SFr27.0 million. The cash flows from the project would be SFr7.5 million per year for the next five years. The euro required return is 13 per cent per year, and the current exchange rate is SFr1.48/€. The going rate on EURIBOR is 8 per cent per year. It is 7 per cent 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 euro cash flows and calculate the NPV.

(c) What is the required return on franc cash flows? Based on your answer, calculate the NPV in francs and then convert to euros.

CHALLENGE