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4. A product sells for $750 in the United States. The exchange rate is $1
to 1.65 Swiss francs. If purchasing power parity (PPP) holds, what is the
price of the product in Switzerland?
a. 123.75 Swiss francs
b. 454.55 Swiss francs
c. 750.00 Swiss francs
d. 1,237.50 Swiss francs
e. 1,650.00 Swiss francs
5. Chen Transport, a U.S. based company, is considering expanding its
operations into a foreign country. The required investment at Time = 0 is
$10 million. The firm forecasts total cash inflows of $4 million per year
for 2 years, $6 million for the next 2 years, and then a possible terminal
value of $8 million. In addition, due to political risk factors, Chen
believes that there is a 50% chance that the gross terminal value will be
only $2 million and a 50% chance that it will be $8 million. However,
the government of the host country will block 20% of all cash flows.
Thus, cash flows that can be repatriated are 80% of those projected.
Chen's cost of capital is 15%, but it adds one percentage point to all
foreign projects to account for exchange rate risk. Under these
conditions, what is the project’s NPV?
a. $1.01 million
b. $2.77 million
c. $3.09 million