XYZ Corp is considering expanding to Europe and starting a project that costs e6M and is expected to generate e1.5M in year 1, e2.0M in year 2, and e2.5M in year 3. The current spot exchange rate is $1.13/e, the US risk-free rate is 2.5%, and the risk-free rate in Europe is 2.1%. Because this is a significantly riskier project than the domestic ones, it was estimated that the cost of capital is 15%. According to a recent market study commissioned by XYZ Corp, it’s believed that the European subsidiary can be sold at the end of the project for e5M.

(a) What are the pros and cons of an international project? What additional risks will the company likely face?

(b) What is the NPV of the project?

(c) What happens to the profits from the international project if the dollar strengthens? What if it weakens? How could the company hedge the exchange rate risk?

Answer rating: 100% (QA)

a Pros of international project Provides greater opportunities Provides higher return for investors ... View the full answer