You are evaluating a proposed expansion of an existing subsidiary located in Switzerland. The cost of the expansion would be SF 32.4 million. The cash flows from the project would be SF 9 million per year for the next five years. The dollar required return is 15 percent per year, and the current exchange rate is SF 1.72. The going rate on Eurodollars is 9 percent per year. It is 8 percent per year on Euroswiss.
We can use relative purchasing power parity to calculate the dollar cash flows at each time. The equation is:
E[St] = (SFr 1.720)[1 + (0.08 – 0.09)]t
E[St] = 1.720 (0.99)t
So, the cash flows each year in U.S. dollar terms will be:
t SFr E[St] US$
0 –32.4M 1.7200 $-18,837,209.30
1 +9M 1.7028 $5,285,412.26
2 +9M 1.6858 $5,338,800.26
3 +9M 1.6689 $5,392,727.54
4 +9M 1.6522 $5,447,199.54
5 +9M 1.6357 $5,502,221.75
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And the NPV is:
NPV = –$18,837,209.30 + $5,285,412.26/1.15 + $5,338,800.26/1.152 + $5,392,727.54 /1.153 + $5,447,199.54/1.154 + $5,502,221.75/1.155
NPV = $-808,462.07
The problem for me is, I cant figure out what numbers replace 9M in the column in order to times the SF and ES to get the US dollars. Whats the formula or where am I just not looking at?
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