a)

Nominal discount rate is calculated using the Fischer equation.

Nominal rate of return for Switzerland is calculated as below:

1+ nominal interest rate = 1+ real interest rate 1+ inflation rate 
1+ nominal interest rate = 1+12% 1+2% 
1+ nominal interest rate = 1.12×1.02
1+ nominal interest rate = 1.1424
nominal interest rate = 14.24%

Nominal rate of return for U.S is calculated as below: Commented [ASC1]: Discount rate instead of interest
rate
1+ nominal interest rate = 1+ real interest rate 1+ inflation rate 
1+ nominal interest rate = 1+12% 1+4% 
1+ nominal interest rate = 1.12×1.04
1+ nominal interest rate = 1.1648
nominal interest rate = 16.48%

Therefore, nominal discount rate for U.S is 16.48% and Switzerland is 14.24%.

It is advisable to invest in a country which has lower inflation rate and/or nominal interest rate,
because inflation reduces the value of money and higher inflation will result in lower returns.
Also, in this case, the company is investing in a project for 1 year, hence the cash flow needs
to be discounted to its present value. A lower nominal discount rate would generate higher net
present value for the project, whereas, a higher nominal discount rate would decrease the net
present value. Therefore, in this case, it is advisable to invest in their local currency, the Swiss Commented [ASC2]: Because swiss franc has lower
Franc. discount rate

b)
Inflation reduces the value of money, as more money is needed to purchase goods. Therefore,
when inflation is high it would result in high production cost, labor cost and ultimately high
cost of goods. High prices would result in decrease in demand of goods. This result in lower Commented [ASC3]: Law of demand is not necessary
foreign investment demands as high inflation would result in lower profit for the business. /appropriate here. To explain, can we just say high costs will
decrease returns?

As is the case with Solitaire, if they invest in U.S dollars, then due to high inflation the present
value of their cash flow would be lower (since their nominal discount rate is high). However,
if the investment is in Swiss Franc, the present value of the cash flow from the project would
be better due to lower inflation rate and hence, lower depletion in value of money.
Thus, as discussed it is advisable to invest in a country with low inflation and or nominal Commented [ASC4]: Currency
interest rate when the real interest rate remains the same. In this case, it is advisable to invest
in their local currency, Swiss Franc.